People cast shadows as they walk in Toronto's financial district, on Nov. 21, 2022.Cole Burston/The Globe and Mail
Canadians are riding the recent stock market rally to bolster their wealth, but they continue to face onerous debt payments that are eating up a large chunk of their take-home pay.
In the fourth quarter, households saw their net worth – the value of all assets minus all liabilities – rise by $290-billion, or 1.8 per cent, to roughly $16.4-trillion, Statistics Canada said Wednesday in a report. Financial assets, such as stocks and bonds, jumped by 5 per cent as investors bid up prices in anticipation of lower interest rates.
This increase in financial assets outweighed a 1.9 per cent drop in the value of residential real estate, a second consecutive quarterly decline.
On the other side of the ledger, Canadians were cautious about taking on debt. Financial liabilities rose by 3.4 per cent in 2023, the weakest accumulation of household debt in a calendar year since 1990.
The numbers suggest that many Canadians are benefiting from asset diversification at a fraught time for personal finances, given the threat posed by higher interest rates and rising debt payments. Still, Statscan cautioned that not everyone is reaping the benefits.
“The accumulation of assets and liabilities is not distributed evenly across wealth quintiles as most wealth is held by relatively few households in Canada,” the report said.
Debt payments are posing a challenge to many families. The household debt service ratio – total obligated payments of principal and interest as a proportion of disposable income – was little changed at 15 per cent in the fourth quarter, similar to highs seen in 2007 and 2019.
In other words, the average household is spending 15 cents of every after-tax dollar to service debt.
Many homeowners have yet to face the full brunt of higher interest rates because they have yet to renew their mortgages since the Bank of Canada started tightening lending conditions in early 2022 in a bid to get inflation under control. Others have variable-rate mortgages with fixed payments, which means that as rates have increased, more of their bill is going toward the interest portion rather than paying down the principal.
Statscan noted that mortgage interest payments have nearly doubled in dollar terms since the start of 2022. In the fourth quarter, around two-thirds of mortgage payments were directed to the interest portion, compared with 46 per cent two years earlier.
The debt service ratio “remains historically elevated and is poised to rise further in the coming quarters (given the lag in mortgage renewals and an expected easing in income growth), adding additional pressure on household spending,” Bank of Montreal economist Shelly Kaushik wrote in a client note.
Borrowers are likely to get some relief this year. Economists are mostly predicting that the Bank of Canada will start to cut its benchmark interest rate – now at 5 per cent, the highest level since 2001 – in June or July. Still, central bank Governor Tiff Macklem has warned that interest rates are unlikely to fall as quickly as they were raised.
The household debt burden – or debt as a proportion of disposable income – declined for a third consecutive quarter to 178.7 per cent. This means that Canadians’ after-tax income is growing at a faster rate than debt.
Put another way, Canadians owe $1.79 for every dollar of disposable income.
“We anticipate that mortgage demand will remain soft, supporting further improvements in debt metrics, until rates begin to fall around the middle of the year,” Ms. Kaushik said.
A notable shift in personal finances is that Canadians are saving more than in the recent past. The household savings rate was 6.2 per cent of disposable income in the fourth quarter. From 2015 to 2019, the quarterly average was 2.2 per cent.
Statscan also noted that exchange-traded funds and money market funds have proven to be popular investments since the middle of 2022. “This may imply that consumers are focusing on shorter investment time horizons and seeking potentially lower fee structures,” the report said.
To start this year, household wealth was likely further buoyed by the continuing rally in equities. The S&P/TSX Composite Index is up 4.8 per cent so far in 2024, while the Standard & Poor’s 500 is up 8.3 per cent.
Maria Solovieva, a Toronto-Dominion Bank economist, wrote in a research note that despite the overall boost in wealth, many households are under stress.
She pointed to a recent uptick in consumer insolvencies, which “suggests that some families are unable to meet their financial obligations.”