Canadians saw their collective net worth fall by the largest amount on record in the second quarter as financial markets and residential real estate hit a rough patch, ending a streak of massive wealth generation during the previous two years of the COVID-19 pandemic.
Household net worth fell by $990-billion in the second quarter to $15.2-trillion, a decline of 6.1 per cent from the first quarter, Statistics Canada said Monday in a report. That was the largest decrease since at least 1990, and eclipsed a 5-per-cent fall in the third quarter of 2008, coinciding with the global financial crisis. Despite the drop, household wealth was still nearly $3-trillion higher than before the pandemic.
Canadians are seeing their personal finances tested as the Bank of Canada aggressively raises interest rates to slow the economy and rein in the highest inflation rates in decades. The real estate market has entered a prolonged slump of dwindling sales and prices, while employment has fallen for three consecutive months as companies taper their demand for labour.
This marks an abrupt shift from the euphoria that persisted for much of 2020 and 2021. After the initial shock of COVID-19, stocks and real estate went on dizzying rallies, helped by rock-bottom interest rates and government pandemic aid, both of which were needed to prevent economic collapse. With fewer options for spending, many people bought wealth-generating assets.
At the same time, Canadians packed on loads of debt, a perennial concern for the domestic economy. That remained the case in the second quarter of this year as households added a near record $56.3-billion in debt, taking total borrowing to $2.8-trillion, mostly in mortgages.
Canadians now owe $1.82 for every dollar of disposable income, just shy of a record $1.85.
The debt binge is a key concern for the economy, particularly as borrowing rates climb higher. The Bank of Canada raised its policy rate last week to 3.25 per cent from 2.5 per cent, noting that interest rates would need to rise even more to curb excess demand in the economy.
“Looking ahead, financial headwinds are only going to intensify, as job gains slow while interest rates continue to march higher,” Ksenia Bushmeneva, a Toronto-Dominion Bank economist, wrote in a client note. “This is going to push debt servicing costs higher over the rest of this year and into the next one,” she added.
The credit tightening cycle hit Canadian real estate quickly. The value of residential real estate fell by 5 per cent in the second quarter, according to Monday’s report. Even so, it remained more than $2.3-trillion (or 41 per cent) higher than at the end of 2019. Home prices have continued to decline since the end of June.
Similarly, the value of household financial assets dropped by 5.7 per cent in the second quarter as both equities and bonds tumbled. Major stock indexes in Canada and the U.S. fell by double-digit percentages between April and June, while bond prices – which move inversely to yields – also fell. “The second quarter marked a less common occurrence when both bond and equity markets declined substantially,” Statscan said in its report.
Since the end of June, North American stock indexes have risen, helping to counter the real estate downturn.
As interest rates climb, Canadians are dedicating more of their budgets to debt repayment. The household debt-service ratio – total obligated payments of principal and interest on debt, as a proportion of disposable income – rose to 13.6 per cent in the second quarter from 13.3 per cent in the first quarter.
Ms. Bushmeneva said the debt-service ratio should surpass its previous peak – 15 per cent in the third quarter of 2019 – by early next year. Based on her calculations, by the end of 2023, total debt-servicing costs are projected to be 30 per cent higher than at the end of March this year. That would translate into the average borrower spending an extra $2,500 a year on their debt.
Statscan noted that total mortgage debt held by households surpassed $2-trillion for the first time. In the second quarter, a slight majority of new mortgage borrowing had variable rates. Many of those borrowers will see their monthly payments stay the same, but more of that sum dedicated to the interest portion as rates rise, thereby extending the time it takes to pay off a mortgage.
“As the housing market continues to cool over the coming quarters, we expect demand for mortgages to slow, potentially helping flatten out household debt ratios,” Shelly Kaushik, a Bank of Montreal economist, said in a research note. “High household indebtedness remains a key vulnerability for the Canadian economy, and one that [the Bank of Canada] will keep an eye on as it stays on its tightening path.”
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