The housing-charged boom in Canadian net wealth is over: RBC
Canadians’ net wealth is about to fall at its fastest pace in decades as rising interest rates, weakening financial and housing markets all weigh on consumers, according to a report by the Royal Bank of Canada.
In a report released Wednesday, it found that Canadians gained a total of $3.9 trillion in net wealth over the pandemic amid higher home values.
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Since then, about $900 billion has been lost as a result of higher rates, and a decline in housing and financial markets, the report states.
In an email to BNN Bloomberg, Carrie Freestone, economist at RBC, said the recent drop is the “largest quarterly decline in net wealth on record” and the “total decline in net wealth that we’re expecting to see will be the largest decline in decades dating back to the early 1990s.”
“We expect a 41 per cent ($1.6 trillion) retracement of those net worth gains from peak-to-trough,” Freestone said in the report.
“While that still won’t retrace all of our pandemic gains, it will nevertheless create a negative ‘wealth effect’ that will drag on consumer spending, even as labour markets soften.”
SPENDING CURTAILMENT TO WEIGH ON ECONOMY
The significant drop in Canadians’ net wealth could have a significant impact on the economy, the report states.
“The dramatic decline in net wealth, combined with rising prices and higher interest rates, will cut roughly $15 billion from household spending in 2023,” Freestone said.
“This is one of the factors that will drive Canada into a recession early next year.”
Freestone said while discretionary spending on areas like home improvement and renovations drove a surge in spending during the pandemic, as rates continue to rise, Canadians will now have to prioritize necessities like food, gas and debt.
“We estimate households will soon have to allocate 15 per cent of their take-home pay just to debt servicing, with half of this attributed to mortgage costs,” she said.
She added that a decline in discretionary items like furniture has already started.
“As this decline deepens, it will weigh on businesses, particularly in the manufacturing sector,” Freestone said.