Statistics Canada says lowest income and least wealthy households under pressure
The negative impact of higher interest rates on low income and less wealthy Canadian households has been highlighted in a new report from Statistics Canada.
It’s analysis of savings and wealth in the third quarter of 2023 reveals that income inequality worsened with the disposable income gap between those in the highest 40% of income distribution and those in the lowest 40% increased to 44.9%, up 0.5 percentage points from a year earlier.
The only group to see average disposable income decline year-over-year were those in the bottom 20% as a 3% rise in average wages and salaries was more than swallowed up by a 43% decline in net investment income.
Although interest rates can be positive for those with certain investments and savings accounts, the report highlights that those with the lowest incomes are less able to take advantage of these, while the negative impact of higher rates affects them more. Lower levels of investment income were exacerbated by higher rates for consumer credit.
Meanwhile, those in the top 20% of income distribution enjoyed a higher increase in average wages (up almost 6%) and net investment income (almost 10%). This group saw the fastest pace in average disposable income and were the only group to increase net investment income.
With budgets tighter - especially due to transportation, health, and housing - the lowest income households were forced to save less, a net 9.8% decrease year-over-year, while the highest income households boosted their savings by a net 4.6%.
Wealth gap widens
The wealthiest 20% accounted for more than two-thirds of net worth in the third quarter of 2023, averaging $3.3 million, while the least wealthy (bottom 40%) accounted for 2.8%, averaging $67,738.
The gap between these two groups widened by 0.2 percentage points year-over-year to 64.6% with gains in the average value of financial assets (+2.7%) and muted growth in real estate values (+0.7%).
The wealthiest held more than half of their asset holdings in financial assets, compared with less than one-third for the least wealthy.
The least wealthy increased their net worth in the third quarter of 2023 by 0.9% while the wealthiest gained 2% with mortgage interest having an oversized impact on the least wealthy compared to real estate gains.
Debt ratio
The report also found that debt-to-income ratios were the highest for core working-age households (aged 35 to 64) ranging from 164.2% to 255.9% and increased by around 6% for these Canadians compared to a year earlier.
Core working age households also saw a faster pace of debt increase compared to disposable income as interest rates increased servicing costs. The debt service ratio was 11.5% for those aged 35 to 44 years (+3.1 percentage points from the third quarter of 2022) and 9.7% for those aged less than 35 years (+2.4 percentage points) as, even though their debt burden reduced, the cost of servicing it was higher.
