The economic landscape of Canadian households witnessed widening disparities in 2023, reflecting the impact of rising interest rates on income and wealth distribution. A recent report from Statistics Canada on household economic accounts reveals significant gaps in income, consumption, saving, and wealth, particularly affecting the lowest income and least wealthy households.
The income gap in Canada expanded to its highest level since 2015, driven by higher interest rates that disproportionately impacted lower-income households. Despite the potential benefits of increased yields on savings and investments due to rising interest rates, these advantages were largely inaccessible to lower-income families due to limited resources for saving and investment.
Higher interest rates, culminating in the Bank of Canada’s policy rate doubling from 2.5% to 5.0% between July 2022 and July 2023, resulted in stagnant average disposable income for lower-income households. While employment and investment income showed gains, these were offset by escalating interest payments on mortgages and credit cards.
The wealthiest 20% of Canadian households saw their average disposable income surge in 2023, driven by substantial gains in wages and net investment income. This group was the sole beneficiary of increased net investment income, with gains in investment earnings surpassing the rise in interest payments.
Conversely, households in the lowest 60% of the income distribution experienced a deterioration in net saving, exacerbated by rising living costs, particularly for housing and transportation.
Wealth concentration remains a persistent issue in Canada, with the top 20% of households holding more than two-thirds (67.7%) of the country’s total net worth. In contrast, the bottom 40% accounted for a mere 2.7% of total net worth. The wealth gap between these two groups expanded to 65.0% in the fourth quarter of 2023, up from the previous year.
While financial asset gains benefited the wealthiest households, the least wealthy struggled to increase their net worth. Mortgage debt growth outpaced the appreciation in real estate values for lower-income households, offsetting potential gains.
Young households, particularly those under 35, faced increasing challenges in managing mortgage debt amid rising interest rates and inflationary pressures. Despite the youngest age group being the only one to reduce mortgage debt balances, this reduction slowed in the fourth quarter of 2023. The increasing cost of homeownership and affordability concerns may be deterring younger Canadians from entering the housing market.
Core working-age households (aged 35 to 64) exhibited the highest debt-to-income ratios in the fourth quarter of 2023. While the youngest households reduced their debt-to-income ratio, they continued to spend more on servicing their remaining debt due to higher interest rates.
Renters faced significant challenges in managing living costs and generating wealth compared to homeowners. With lower incomes and higher housing costs, renters found it increasingly difficult to save, leading to a widening wealth gap between homeowners and renters.
The persistent high interest rates and inflationary pressures are likely to continue straining households’ financial stability, particularly among vulnerable groups such as lower-income households, renters, and younger age groups. Recent data indicates a slowdown in mortgage borrowing as rising interest rates and soaring home prices deter potential buyers.