The recent stock market rally is padding the finances of Canadians, who have seen their collective wealth jump to record levels in the early months of the year.
Household net worth – the value of all assets minus liabilities – rose by nearly $550-billion or 3.3 per cent during the first quarter of 2024, Statistics Canada said Thursday in a report. That brought overall household wealth to $16.9-trillion, surpassing the previous nominal high in early 2022.
As they contend with higher interest rates, Canadians have also reined in their borrowing. Total liabilities rose by $8.7-billion to start the year, an increase of just 0.3 per cent.
Toronto-Dominion Bank economist Marc Ercolao said he expects household wealth got another boost over the spring months.
“First, we expect home prices to rise over the coming quarters as financial conditions and mortgage rates slowly ease,” he wrote in a client note. “Likewise, equities have propelled higher in the second quarter on the back of strong economic performance stateside and the anticipation” of lower interest rates in the U.S.
Canadians have been keen to join in the stock rally. Households acquired nearly $24-billion in shares of pooled investment funds – mostly exchange-traded funds – in the first quarter, exceeding total acquisitions in 2023.
Despite recent struggles in the housing market, the value of residential real estate rose $213-billion or 2.6 per cent in the first quarter, another boon to personal finances. While home-buying activity is much weaker than in the frenzied period of 2020 and 2021, it has picked up from recent lows.
Still, Statscan noted that most wealth is held by relatively few households. For example, in the final quarter of 2023, more than 90 per cent of net worth was held by households that own a home. Those in the bottom 20 per cent of the wealth distribution have negative net worth – meaning, their liabilities exceed the value of their assets.
On the debt side, there were marginal improvements. The household debt-service ratio fell to 14.91 per cent in the first quarter from 14.98 per cent in the final quarter of 2023. Put another way, the average household spends nearly 15 cents of every after-tax dollar on obligated debt payments.
Household debt has been a key vulnerability for the Canadian economy over many years, predating the Bank of Canada’s efforts to bring inflation under control with aggressive hikes to its policy interest rate.
A large proportion of homeowners will renew their mortgages over the next two years at what are widely expected to be higher interest rates, leading to a potential payment shock. Thus far, many homeowners have been shielded from the full impact of higher rates because their monthly payments are fixed in dollar terms.
Canadians made $68.5-billion in debt payments in the first quarter, the most on record. More than 60 per cent of those payments were dedicated to the interest portion, rather than paying down the principal.
Over all, the household debt burden – total liabilities as a percentage of disposable income – was 176.4 per cent in seasonally adjusted terms. This means the average household owes $1.76 for every post-tax dollar it earns.
Still, this ratio has trended lower over several quarters. The debt burden peaked at 185.4 per cent in 2021, suggesting that Canadians are hesitant to borrow, with debt rising at a slower pace than disposable income.
“Household debt metrics largely improved in the first quarter as incomes grew faster than borrowing, with the latter weighed [on] by elevated rates,” Bank of Montreal economist Shelly Kaushik wrote to clients. “With rates unlikely to return to levels seen over the past decade, debt-to-income ratios look to continue their downtrend.”
Last week, the Bank of Canada trimmed its trend-setting benchmark interest rate to 4.75 per cent from 5 per cent, the first cut in more than four years. The central bank is widely expected to continue cutting over this year and next.
BoC Governor Tiff Macklem has indicated that further cuts will likely be gradual and that consumers shouldn’t expect a return to the ultralow rates that were seen for more than a decade before the pandemic.
“We expect growth will gradually pick up, and as long as inflation keeps coming down, it is reasonable to expect further interest-rate cuts at some point,” Mr. Macklem said Wednesday in Montreal at an event. “We’ll be taking it one meeting at a time, but I feel like the base case is looking better.”
Matt Lundy