The financial health of households deteriorated significantly in the second quarter, in the context of a 125 basis point increase in the key rate. To say that the Bank of Canada has added 175 more since — and that it does not plan to stop there.
The wealth effect measured during the pandemic, combined with the feverish surge in stock prices and property prices, is far behind. The correction of the markets (financial and real estate) and the inflationary slippage are now having a heavy impact on the financial health of households. With, also, an increased recourse to indebtedness in a context of rapidly rising interest rates, the decline observed in household wealth in the second quarter is intended to be the largest ever recorded, indicates Statistics Canada.
Household net worth, ie the value of assets minus liabilities, fell 6.1% from the first quarter, weighed down by the fall in the stock, bond and housing markets. In dollars, 990 billion were erased – on paper for the most part, one must believe – between April and June.
The value of total household financial assets declined for a second consecutive quarter, posting a record decline in the second quarter. The fall in stock and bond prices reduced the value of financial assets by 5.7%, while the major stock market benchmarks entered a fundamentally bear market with two consecutive quarterly losses. Added to this is a fall in the value of non-financial assets with, as a result, a 5% erosion in the value of household residential property, under the influence of the rise in interest rates.
The average Canadian resale price fell 10.5% from the first quarter to about $710,000 in the second. Rebalancing accelerated with the average price falling to $635,000 in July, a further decline of 10.5%. Weak consolation, at the end of June, the value of household residential real estate remained more than 2.3 trillion dollars (+41.1%) higher than the level recorded at the end of 2019, writes Statistics Canada.
So much for the asset.
As for financial liabilities, they increased by 69.8 billion during the second quarter “under the effect of the continued expansion of outstanding mortgage debt and increased consumer spending”. The federal agency reports an acceleration in the pace of credit market borrowing from the first quarter, as households added $56.3 billion to debt in the second quarter. While mortgage loans remained the main source of new borrowing, it is also noted that “demand for non-mortgage loans recorded two consecutive quarters of activity (+8.3 billion dollars in the first quarter and +7.7 billion to the second), which had not been observed since the beginning of 2018”.
Popular Variable Rates
As for new residential mortgages taken out in the second quarter, 51.1% were at variable rates. They accounted for 32.5% of total mortgage debt, up from 29.8% in the previous quarter, says Statistics Canada. The yield differential favoring the variable rate narrowed or even reversed in the meantime, as the Bank of Canada’s monetary tightening began and the end of quantitative easing, with a first increase in the key rate that occurred at the beginning of March.
Looking ahead, this deterioration in the financial health of households can be attributed to the situation of a 175 basis point increase in the Bank of Canada’s key rate, on top of the 125 basis points in the second quarter. And in view of other increases to be expected, the central bank warned.
“As the effects of monetary policy tightening become more evident, the Bank will assess how far further interest rates will need to be raised to bring inflation back to the target” of 2%, she warned. earlier this month, following the announcement of a fifth target rate hike this year.
For its part, the pace of inflationary slippage has accelerated, with the 12-month increase in inflation as measured by the Consumer Price Index rising from 6.7% in March to 8.1% in June. It fell back to 7.6% in July. This pressure on prices is already being felt in the savings rate of Canadian households, which fell from 9.5% to 6.2% between the first and second quarters. With the drop in government transfers, household disposable income only increased by 1% in the second quarter, while the nominal value of their consumption grew by 4.3% under the effect of generalized price increases.
But here too, small consolation, by way of comparison, the average household savings rate observed over the 10 years preceding 2020 was 3.4%, recalls Statistics Canada.
“With asset values falling, liabilities rising, and the savings rate trending lower, the second quarter likely marks the final jolt of the strong growth in national net wealth seen during the pandemic,” suggests Randall Bartlett, Senior Director, Canadian Economy at Mouvement Desjardins.