Editorial — Lower interest rates should not be incentive to borrow even more

People with high levels of debt should take advantage of lower rates, primarily to reduce their interest costs.

The move to lower the Bank of Canada’s key lending rate by 0.25 per cent last week caught most observers and analysts by surprise.

While the main reason for the surprise drop is economic uncertainty caused by the sharp fall in the price of oil, it will have many ripple effects.

The move means that interest rates will be lower for almost all loans. While that can be a very good thing for people with variable rate mortgages, lines of credit or about to renew their mortgages, it also may encourage some people to take on more debt.

For most Canadians, and particularly for younger people who own their own homes in this part of B.C., that can be a very bad move.

The Metro Vancouver area has the second most unaffordable housing in the world, based on household income. The only place that is even more unaffordable is Hong Kong.

However, Hong Kong has some good reasons to be so unaffordable. It is situated on a very small piece of land, and while officially part of China, it operates with a very different economic and legal systems. It is a hub for business in Asia and is definitely a world-class city.

Vancouver, on the other hand, is situated in a beautiful geographical area but its economy is nothing like Hong Kong’s. While some aspects of the Metro Vancouver economy like port activity and software development are quite robust, many other areas of the economy are struggling. This has led to a virtual freeze on many people’s wages in the past six years, yet housing prices have continued to rise.

While the highest and most outrageous prices are in Vancouver, West Vancouver and Richmond, due at least in part to offshore investors parking their money in what they perceive  as a very safe environment, the ripple effect of this activity has boosted prices in all regions of Metro Vancouver. It has driven many people farther and farther from their jobs, as they attempt to find something they can afford.

The result of all this is that younger first-time buyers have taken on enormous amounts of debt to service their mortgages. Because of this borrowing, they often have taken out other loans to meet other expenses, such as auto loans or payday loans.

The average Canadian debt level is over 160 per cent, meaning that people owe over $1.60 for every dollar that they make.

Lower interest rates will likely be beneficial to the larger Canadian economy, but people who already have high levels of debt should take advantage of them primarily to reduce their interest rates (and hopefully pay off their debts more quickly) — not to borrow even more money.