A recent release of household economic accounts for the third quarter of 2023 reveals a concerning trend in Canada, as income and wealth gaps have widened compared to the same period in the previous year. The increase in interest rates during this time has had a particularly negative impact on the lowest income and least wealthy households.
The third quarter of 2023 saw an escalation in income inequality, with the gap in disposable income share between the top 40% and bottom 40% of the income distribution reaching 44.9%. This represents a 0.5 percentage point increase from the same quarter in 2022. Most notably, the lowest income households in the bottom 20% experienced a 1.2% reduction in average disposable income, attributed to a decrease in net investment income by 43.4%.
The rise in interest rates, including a doubling of the Bank of Canada’s policy interest rate, played a significant role in the decline of average disposable income for the lowest income households. Increased interest payments, primarily related to consumer credit, outweighed gains in investment earnings.
In stark contrast, the highest income households (top 20%) witnessed the fastest growth in average disposable income, increasing by 3.2% in the third quarter of 2023. This surge was driven entirely by gains in wages (5.7%) and net investment income (9.9%). The wealthiest households were the only group to experience an increase in net investment income, with almost three-quarters of the rise in interest payments attributed to mortgage debt.
Net saving for the lowest income households declined by 9.8%, while the highest income households saw a 4.6% increase in the third quarter of 2023. Cost-of-living increases, particularly in transportation, health, and housing, outpaced income gains for the lowest income group.
The wealth gap in Canada expanded further in the third quarter of 2023, with the top 20% of households holding more than two-thirds (67.4%) of the nation’s net worth. In contrast, the bottom 40% accounted for a mere 2.8%. The gap in wealth between these two groups increased by 0.2 percentage points, reaching 64.6%.
Real estate values showed muted growth (0.7%), but gains in financial asset values (2.7%) benefited the wealthiest households. Financial assets constituted over half of the asset holdings for the top 20%, compared to less than one-third for the least wealthy.
Despite holding and acquiring real estate, the least wealthy households experienced minimal growth in net worth due to a simultaneous increase in mortgage debt (1.7%). The wealthiest households, however, increased their net worth by 2.0%, primarily driven by financial asset gains.
Younger households, facing affordability concerns amid rising interest rates, were the only age group to reduce their average mortgage debt by 5.0%. Core working-age households (35 to 64 years) saw increased debt-to-income ratios, while the youngest households’ ratio declined due to reductions in mortgage debt and strong wage gains.
The interest-only debt service ratio (DSR) increased for younger age groups, indicating that, despite carrying less debt, they were paying more to service their remaining debt due to higher interest rates. Persistently high interest rates and inflation may further strain households’ financial capacities, particularly among vulnerable groups.
In light of these findings, there are concerns that ongoing economic challenges may push households, especially those with the lowest income, least wealth, and in younger age groups, further into debt. The Monthly Credit Aggregates program’s latest figures show continued household debt growth up to November 2023, suggesting that the situation may persist.