Canadian household wealth reached a record in 2021, analysis shows, but borrowing costs are also on the rise
A recent report by RBC Economics revealed that household net wealth soared to a record $15.9 trillion in Q4 2021—a whopping $3.6 trillion more than pre-pandemic (2019/Q4) levels.
Contributing to that is a 5% increase in financial sector assets in Q4, which will most likely be partially offset by weaker stock markets in Q1. Over the last two years, however, increasing real-estate values have driven up household equity in real-estate properties, accounting for more than half of net asset gains (57%).
Household debt is also at all-time highs, according to the report, owing to strong housing markets that have prompted additional mortgage borrowing. Mortgage debt increased by $44 billion in Q4/2021, bringing the total to above $300 billion since the epidemic began.
The closely scrutinized debt-to-income ratio hit a new high of 186.2% in Q4 because of this, as well as a drop in disposable income as government pandemic aid continued to fade.
Debt payments are still minimal but increasing and higher epidemic debts were accumulated at extremely cheap interest rates. As a result, payments linked with higher debt levels consume a lesser percentage of disposable income than they would otherwise.
Additionally, the report says that in Q4, the debt payment-to-income ratio increased, although it remained significantly below pre-pandemic levels at 13.8%. Over 73% of household debt is in the form of mortgages, the majority of which are fixed rate and will not adjust as market rates rise.
As mortgage loans are renewed, rising interest rates are projected to drive up debt servicing costs. But strong demand and restricted supply are pushing wages upward, so disposable incomes are projected to rise as well. Overall, household debt service ratio will continue to decline in 2023, returning to pre-pandemic levels.
The Bank of Canada raised interest rates again since 2018 earlier this month. Another hike is expected in April.
Though Russia's invasion of Ukraine has heightened geopolitical instability, higher global commodity prices are contributing to inflationary pressures that were already acute. Furthermore, the labor market is too strong to justify the current emergency-low interest rates.
During the epidemic, households built up a sizable savings account as government assistance bolstered incomes and COVID-19 limitations limited spending options. Even if interest rates rise and the war in Ukraine raise global inflation rates, this savings hoard is projected to help protect consumer purchasing power.
However, the financial cushion has not been spread evenly. Savings balances did not increase significantly for lower-income households, despite the fact that these households borrowed less.
Credit card borrowing has increased as government epidemic assistance has dwindled. Lower-income households are also more vulnerable to interest rate rises since they have larger debt levels compared to income.
Those households also spend a higher percentage of their income on non-discretionary things (energy and food), which are both necessary and becoming more expensive because of Russia's invasion of Ukraine.
Overall spending is expected to remain stable, with pent-up demand from individuals at the top of the income scale boosting travel and hospitality purchases. However, the pandemic's economic effects continue to be felt by some people.
