Albertans would be hardest hit by interest rate hikes, Royal Bank says

Households in Alberta will feel the most pressure from rising interest ratesbecause residents in the province carry the highest debt loads in the country,according to a new report from the Royal Bank of Canada.

Alberta residents would see the biggest increase in debt-service payments in Canada more than $1,200 a year on average if interest rates rose by one percentage point, Robert Hogue, a senior economist at RBC Economic Research, saidin a report on Tuesday. That's the amount of money needed to make payments on the principal and interest on outstanding loans.

The Bank of Canada has already hiked interest rates three times sincemid last year, raising the key lending rateby a total of 75 basis pointsto 1.25 per cent.

"Households in B.C. and Ontario are also more indebted than the national average, but Albertans carry the heaviest debt loads," Hoguesaid.

"A booming provincial economy and strong income gains between 2011 and 2014 emboldened households in Alberta to buy homes (sales growth averaged over 10 per centper year in that period) and accumulate significant debt, leaving them with high debt loads when incomes dropped following the plunge in global oil prices."

Hogueadded that Alberta residentsare also holding more shorter-term mortgage debt than other Canadian households, but higher-than-average incomes offer them "some breathing room."

Higher incomes in the province are a "mitigating" factor,Hoguesaid asdebt service payments accountedfor over 15 per cent of disposable income in 2016, which is just a bit more than in B.C.

How much debt?

But on average, household debt in the province rose from $164,000 in 2010 to $192,000 in 2016, according to the report.

"These numbers include households who are debt-free, so actual outstanding balances for those carrying debt are even higher," Hogue said.

Mortgages accounted for the majority of debt that Alberta households carried, with the average going up to $124,000 in 2016 from $96,000 six years earlier. That's a nearly 30 per cent jump.

Meanwhile, debt-service payments in the province arealready the highest among all Canadians at an average of $15,300 per household in 2016.

That compares to $13,700 paid by B.C. residents, and $12,600 paid by Ontario households on average. The overall average for Canadians in 2016 was $11,600.

"These amounts aren't pocket change. In Alberta, for example, the $1,200 no longer available for spending on everyday goods and services or saved for future consumption. Itwould exceed what households spend on entertainment ($1,000) or furniture ($800) each year," said Hogue.

"Their debt-service bills will get bigger, and possibly sooner than elsewhere in the country, when interest rates rise. It's bound to cause many households to spend more cautiously on other goods and services."

This could potentially hold back economic growth more in Alberta, B.C. and Ontario than in other provinces, Hoguesaid.

Canadian household debt as a share of income remained near a record high in the fourth quarter, according to the latest figures from Statistics Canada in March, as home sales fell in the previous month.

Meanwhile, markets are pricing ina nearly 70 per cent chance that the Bank of Canada will raise interest rates again in July.