As a result of a changing economic landscape, British Columbians are taking a direct hit to their wallets, coming up short by $269 dollars a month compared to a few months ago, according to an Ipsos survey released this week.

Out of all the provinces, British Columbians reported the biggest drop in disposable income by far, bringing the amount down to $734 a month -- a reversal from the last quarter, when the province had the most disposable income in Canada. That’s likely the result of higher interest rates in a city with high real estate values and big mortgage payments, says Grant Bazian, president of MNP Ltd., which commissioned the Ipsos survey.

“Vancouver has some of the highest dollar mortgages in the country, so one quarter of a percent makes a difference,” says Bazian. “A big mortgage could be part of it, and maybe inflation is hitting the province harder than other parts of the country.”

Borrowers Nation-Wide Are Feeling the Pinch

Interest rate increases and the highest rate of inflation since 1991 are causing Canadians to lose some sleep over potential mounting debt, according to MNP Ltd., a nation-wide insolvency firm. Since 2017, Ipsos, on behalf of MNP, has conducted a quarterly Consumer Debt Index on consumers’ ability to meet their financial obligations -- and the index is currently the lowest it’s ever been. Bazian called the feedback “alarming.”

More than half of Canadians, 52%, say they are already feeling the impact of interest rate hikes. A surprising 49% said they are $200 away from not being able to make ends meet within the next year. And 31% said they don’t earn enough to cover debt payments and household bills. And while B.C.-ers might have seen a major plunge in disposable income, they’re still doing better than most Canadians, who have an average amount of $728 left after all the bills are paid.

According to the Ipsos poll, 5%, or nearly two million Canadians will be renewing their mortgage over the next 12 months.

Contending With a New Interest Rate Reality

Meanwhile, interest rates are expected to continue to rise. There is a young generation of homeowners who’ve never known rates to be as high as they are now, with a five-year fixed term rate at close to 4%. During the pandemic, that rate was at an unprecedented 1.7%. On top of the rate hike, consumers are also dealing with 5.7% inflation.

READ: As Fixed Mortgage Rates Hit 4%, Fewer Buyers Can Afford to Lock In

“The double whammy is causing a lot of people anxiety, especially the younger generation who’ve never seen high interest rates,” says Bazian. “Their whole young adulthood has been based on low interest rates. Money was cheap whether you were financing a car or a house or household appliance or anything. Variable interest rate mortgages were not a concern… so you just carried on.”

Now, those holding mortgages could see payments go up $200 to $600 a month, and they could be in trouble without a contingency reserve. The stress test could only help so much, says Bazian.

“Maybe when they applied for the mortgage the stress test was apropos but now it’s not, especially if they have a variable rate mortgage or their mortgage is coming due, because they are facing a new landscape... And they haven’t seen the end of it.

“Even though they got the early inheritance and the good down payment on the property, they still probably hold significant mortgages.”

Bazian said he expects to see default rates go up as rates go up.

“If you’re not watching your dollars personally, it’s going to push more people over the edge and you’re going to have more people filing for bankruptcies and [consumer] proposals as a result—especially if you don’t have savings and wiggle room.”

RE/MAX Canada released its own Leger survey that echoed the financial worries that are plaguing consumers. Over the next five years, 50% of Canadians cited taxation as one of their top three concerns about buying a home, with 42% worried about an economic recession and 46% concerned about rising interest rates.

Christopher Alexander, RE/MAX president, said he expects mortgage holders would have prepared themselves for the inevitability that rates would ultimately increase.

“To be expecting rates to be as low as they were forever and ever is just not smart. I think most Canadians have been prepared for this, and if they haven’t it’s really unfortunate, because they really had one place to go, and that was up.

“People will adjust their lifestyles and it will be a last resort to sell based on affordability for people. I think Canadians generally speaking are a bit more responsible. 

“The stress test was in there for a reason, it was for these rate hikes. So people should be able to afford it if there is a big jump.”

CIBC economist Benjamin Tal said in the RE/MAX report that the enemy for the housing market is not higher interest rates, but the rate at which they rise. The Bank of Canada should raise interest rates at a reasonable schedule four times a year at a pace that can sustain a stable economy and less-heated housing market, said Tal.

At the Vancouver Real Estate Forum on April 12, held in-person for the first time since the pandemic began, Tal told a packed room that past recessions were caused by flawed monetary policy. But he offered some cautious optimism, too. 

READ: Vancouver Home Sales Dipped in March, But Prices Are Up 20%

“Every economic recession over the past 40 or 50 years was helped, if not caused, by monetary policy error that raised interest rates too quickly. Central bankers are also human,” said Tal.

Interest rates needed to go up, he said, and the economy can adjust to a neutral rate at around 2.25%. If it goes beyond that, a recession could occur in 2023, said Tal. 

He offered some hope for those two million people whose mortgages renew this coming year. They will likely still have the advantage of a lower interest rate than what it was five years ago, said Tal. That should be a sustainable situation for most. He also predicted inflation to ease off as the pandemic wanes.

“We are getting slowly to a balanced [housing] market. It’s not as crazy as it used to be. That will be a very healthy slowdown.

“If you think about it for a second, homebuyers got the benefit of a recession vis a vis extremely low interest rates without the cost of a recession. There was this sense of urgency to get into the market. Parents were encouraging them. One third of homebuyers got a gift from parents. The average gift in Vancouver was $340,000. That’s some gift.

“So the market is going to balance with interest rates rising and that will be a very good thing.”