In the third quarter of 2023, a new report from Statistics Canada reveals a concerning trend as household net worth takes a hit amidst a backdrop of weakened financial and housing markets. Here’s a comprehensive analysis of the key findings and their implications on the Canadian economy.
Canadian households experienced a 1.8% decrease in net worth, equivalent to a reduction of $301.2 billion, bringing the total to $16,168.3 billion. The decline was primarily driven by setbacks in both financial and housing markets. Real estate values dipped after a brief recovery, and domestic and foreign equity markets softened, with notable declines in the S&P 500 Index and the S&P/TSX Composite Index.
As a result, the total financial assets of households contracted by 2.1% (-$196.3 billion), and non-financial assets fell by 0.8% (-$74.5 billion). Financial liabilities, primarily consisting of mortgage and non-mortgage debt, saw a modest increase of $30.5 billion, marking the slowest year-over-year expansion (3.2%) since 1990.
Despite an increase in the household saving rate to 5.1%, the growth in Canadian currency and deposits slowed down, posting the smallest quarterly increase since Q1 2021. Additionally, households experienced net redemptions in mutual funds, totaling $2.7 billion in the third quarter. This occurred alongside continued inflows into money market funds, benefiting from higher interest rates.
Residential real estate values took a hit, declining by 1.0% (-$85.1 billion) in Q3, reversing the upward trend observed in the first half of 2023. The average resale price of homes fell by 8.3%, representing a drop of almost $60,000. However, the number of home sales increased by 5.1% compared to the same quarter last year, indicating a mixed scenario in the housing sector.
In Q3, household credit market borrowing saw an uptick, with a demand for $24.5 billion in funds, reversing the trend of four consecutive quarters of deceleration. The surge was driven by increased demand for mortgage loans, rising from $13.8 billion in Q2 to $19.4 billion in Q3. The seasonally adjusted stock of household credit market debt reached $2,889.4 billion, with mortgage debt accounting for almost three-quarters of the total outstanding debt.
The household debt service ratio increased to 15.22% in Q3, up from 15.08% in Q2. The amount of total mortgage interest payments has surged by 89.6% since the Bank of Canada began raising interest rates in Q1 2022. While mortgage interest payments decelerated slightly in Q3 (+3.6%), mortgage principal payments increased marginally (+0.2%) after five consecutive declines.
Government Borrowing and Foreign Asset Position
The federal government’s credit market borrowing slowed, borrowing $9.5 billion in Q3 compared to $28.2 billion in Q2. The Bank of Canada continued its quantitative tightening program, allowing a record $33.0 billion worth of federal government bonds to mature without replacement. Canada’s net foreign asset position improved slightly, despite global financial market declines, as the Canadian dollar weakened.
Despite the challenges faced by households, the national net worth remained nearly unchanged at $18,352.6 billion in Q3. Natural resource values dropped, but this was offset by growth in Canada’s produced assets. Canada’s net foreign asset position edged up by $5.5 billion to reach $1,382.4 billion in Q3, following three quarters of substantial increases.
The economic landscape in Canada faces headwinds as households grapple with declining net worth, increased debt service costs, and challenges in both financial and housing markets. The impact of these trends on the broader economy remains a critical aspect to monitor in the coming quarters.