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B.C. households most at risk to debt shocks

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Canadians are struggling with record debt loads - though not every province is equally at risk.

Households in British Columbia are most vulnerable to an unexpected economic shock like falling house prices, swift interest rate hikes or a surging jobless rate, a paper by Toronto-Dominion Bank said Wednesday.

Those in Alberta and Ontario are the next most at risk, with Alberta's vulnerability rising at the fastest pace in the country, the bank's report said. Households in Manitoba, by comparison, are cushioned with relatively low debt loads, it noted.

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Canadians' debt-to-income levels have swelled to a record in recent months, surpassing levels in the U.S., prompting warnings from the Bank of Canada that households need to start reigning in debt. The worry is that, as interest rates start to rise later this year, some households will be under water. Several major banks already hiked their mortgage rates this week.

"With higher interest rates on the horizon set to boost the cost of servicing debt, this upward trend in vulnerability is almost certain to continue over the next one-to-two years," said TD economists Craig Alexander, Derek Burleton and Diana Petramala.

Their measure of household vulnerability is not meant to predict the future. But it is intended to show which parts of Canada are most "prone in the event of an economic surprise," they said.

If Canadians don't slow the rate at which they're piling on debt, the risks of a consumer "adjustment" will only intensify, they added.

Debt loads are higher in B.C. for a number of reasons, including higher homeownership costs. The province is the only one in Canada where the average savings rate is negative. Up to one in ten households in B.C. would be in financial stress if interest rates rise, it said.

TD expects the Bank of Canada's overnight lending rate to hit 3 per cent by the end of 2012, from 1 per cent currently.

The measure they created captures debt loads at the provincial level by tracking trends like the personal savings rate and the ratio of existing home prices to income.

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Among TD's conclusions:

* Vulnerability has been growing from coast to coast over the past two years.

* Soaring household debt-to-income and home-price-to-income ratios are the main reasons for that.

* Debt-service ratios, or the cost of servicing all that debt, are still in the "comfortable" range.

* All regions will see a "substantial" increase in vulnerability in the next few years.

* A crisis isn't in store for any one region. And the pace of household debt growth should slow.

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Still, "the cooler trends expected in both borrowing and spending will need to be sustained for at least a few years before the warning lights stop flashing red," the economists said.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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