A condo building is seen under construction surrounded by houses in Vancouver, B.C., on Friday March 30, 2018.DARRYL DYCK/The Canadian Press
Canadian households are seeing their wealth rise at a record-setting pace, bolstered by torrid activity in residential real estate and continuing gains in the stock market.
On a cumulative basis, household net worth jumped 6 per cent in the first quarter to $13.7-trillion, Statistics Canada said Friday. That is the largest increase on record.
And over the past year, household wealth has surged by $2.4-trillion or 22 per cent, an unparalleled rally for assets, despite the disastrous impact of COVID-19 on the broader economy.
But the crisis response – massive fiscal stimulus, along with rock-bottom interest rates – has kept household balance sheets in good shape, while encouraging a lot of borrowing.
To that end, the ratio of credit-market debt to disposable income – a metric that is eyed closely for signs of financial distress – dropped to 172.3 per cent in the first quarter, from 174 per cent, adjusted for seasonality. Disposable income grew faster than debt, helped by elevated government benefits in the second wave.
Put another way, Canadian households owe $1.72 for every dollar of post-tax income. (Before the pandemic, the household debt burden was often around 180 per cent.)
Still, that metric could come under pressure in short order. Since the end of 2019, households have added $124-billion to their total debt, entirely in mortgages. And as Canada eyes a return to normalcy, some government income supports are nearing their expiration dates.
“Canadian household finances improved in the first quarter of this year,” said Bank of Montreal economist Priscilla Thiagamoorthy in a report. “Although the growth of mortgage debt could continue to slow in the coming quarters, the flow remains elevated. As such, housing-market imbalances and still-high household debt remains a key vulnerability to the Canadian economy.”
Real estate is playing an outsized role in finances. The value of residential real estate surged by $596-billion last quarter, a record 9.5-per-cent increase. Fuelled by ample savings and attractive interest rates, Canadians upped their investments in housing by 15 per cent to start the year, spread broadly across resale homes, new construction and renovations.
At the same time, households took on $29-billion in mortgages – a slight decrease from the fourth quarter, but still the second-largest tally on record. (Non-mortgage debt, such as credit cards, has actually decreased over the course of the pandemic.)
The spoils are not shared evenly, however. Households that own their homes captured $730-billion of the wealth increase in the first quarter, versus $43-billion for renters. On average, homeowners saw their net worth rise roughly $73,000 to start the year, compared with around $8,000 for renter households.
Equity holders also got a boost. The value of financial assets rose by $193-billion to start 2021, or 2.4 per cent. Households have ramped up their purchases of mutual funds and exchange-traded funds, “likely as they look to put the substantial buildup of their currency and deposits into investments that yield higher returns,” Statscan said.
A key question is how interest rates evolve. The Bank of Canada has signalled that its key lending rate could start to climb in the second half of 2022.
“Still, interest rates could rise sooner than anticipated if the economy and labour market outperform expectations and inflation remains elevated,” said Toronto-Dominion Bank economist Ksenia Bushmeneva in a note to clients.
For now, debt obligations look manageable. The household debt-service ratio – which measures total obligated payments of principal and interest as a share of disposable income – fell 10 basis points in the first quarter to 13.45 per cent. (A basis point is 1/100th of a percentage point.) Before the pandemic, the debt-service ratio peaked at just over 15 per cent.
Another question is how Canadians spend in the coming months.
The household savings rate has been in double-digit percentages for a full year, in part because of relatively few places to spend. Major banks say Canadians have saved in excess of $200-billion over the pandemic, which could underpin a consumer-led economic recovery as the virus wanes.
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