Canadians are diverting personal savings toward paying down debt rather than investing, contributing to a decline last year in the value of investments – the first in a decade.
After nine years of strong growth, Canadians’ financial wealth, which includes deposits, investment funds and direct holdings of securities, suffered its first decline since the 2008 financial crisis, according to the 2019 Household Balance Sheet Report released on Tuesday by Investor Economics.
As more investors continue to pay down their personal debt, asset management companies could experience a decline in the amount of money going into their investment products, specifically toward retirement savings, the report said.
The shift in asset allocation by investors follows a decade in which debt-to-income ratios in Canada have been on the rise. Currently, Canadian debt-to-income levels are more than 20 per cent higher than in late 2007, according to Statistics Canada. In Canadian cities such as Victoria, Vancouver and Toronto, debt-to-income ratios exceeded 200 per cent in 2016, StatsCan says. Meaning a household with $50,000 in after-tax income had more than $100,000 in debt.
“The final months of 2018 delivered a sobering message to Canadian households and the financial services industry alike, with market concerns over Brexit, a U.S.-China trade war and other factors depressing asset valuations and prompting a rise in interest rates,” said Goshka Folda, president and CEO of Investor Economics, a division of ISS Market Intelligence, which provides research to the financial services industry.
“This has translated into a sharper focus by Canadian households in diverting discretionary financial assets toward lowering personal debt.”
In 2018, at least $45-billion additional dollars were directed toward debt repayment, above and beyond what households would have typically repaid had interest rates and market conditions not changed, the Investor Economics report said.
Canadians typically have saved $120-billion to $140-billion a year. But in 2018, with rising interest rates, many investors began to move money out of high-interest savings accounts (which typically yield about 1 per cent) to pay down their home equity lines of credit, which cost approximately 4.25 per cent, said Carlos Cardone, senior managing director of Investor Economics.
“This is money that is not going into financial assets – including money not going into tax-free saving accounts and registered retirement savings plans," Mr. Cardone said in an interview. “It is changing the allocation of money.”
Despite a surge in debt repayment, Canada’s overall pool of debt is not declining, he added.
“Baby-boomers focused on debt reduction will be counterweighted by younger demographics entering their debt-taking years."
With equity markets expected to remain modest and households continuing to pay down debt, the accumulation of financial wealth of Canadian households will slow to an average annual rate of 5.6 per cent over the coming decade, compared with 6.7 per cent between 2008 to 2018, the report said.
At the end of 2018, the total financial wealth in Canada reached $4.4-trillion. The report projects that wealth to hit $7.6-trillion by 2028, of which nearly half will be owned by retirees.
The slowdown in growth for financial wealth, combined with an aging population, will present opportunities for Canada’s investment managers to expand their services for financial, retirement and estate planning.
“We are going to see hundreds of thousands of people moving into retirement over the next several years, of which many are not financially prepared,” Mr. Cardone said. “More than 70 per cent of those retiring over the next decade have less than $100,000 in financial wealth, and while some may have real estate assets, monetizing these assets requires some significant changes to lifestyles.”