Surprisingly, the net worth of Canadians held steadfast throughout the pandemic. Households could finish 2020 better off unless a second COVID wave hits or the end of government support programs hits too hard.
“Following a large decline in Q1, Canadian household net worth rebounded in the second quarter. It increased by 5% and rose above its pre-pandemic level,” notes Ksenia Bushmeneva, an economist at TD Economics that closely follows the financial situation of households.
Most of the increase comes from what Bushmeneva characterizes as a “massive gain” of 7.1% in the value of financial assets, essentially linked to the rally in equity markets. Non-financial assets (mostly housing), for their part, also posted gains, though more muted at 1.1%. “It is remarkable that real estate and land valuations have held up in the face of the pandemic,” she adds.
The Right Balance
Unexpectedly, things improved on both sides of the balance sheet as debt went down and savings, along with assets, went up: a startling 28%. While credit market debt was still charging ahead at a 1.1% yearly pace of increase before the pandemic, it throttled back at 0.01%. Overall debt during the last quarter contracted “massively”, says Bushmeneva, as it declined by 3.3%, a decline prompted by lower consumer spending and little new borrowing.
“Canadians have proven to be fiscally responsible as the Canadian household debt burden actually fell in the second quarter from the first quarter as Canadians sharply cut their spending when the economy went into a national lockdown. Households also took the opportunity to conserve cash and pay down debt,” comments Lesley Marks, chief investment officer & head of investment management at BMO Wealth Management.
Indeed, all debt-related numbers have improved. Standing at an alarming level of 175.4% before the pandemic, the debt-to-income ratio has fallen to 158.2%. That’s still high, but a drop is nevertheless significant. The debt service ratio also improved and fell to 12.4% of disposable income, well below its peak of 14.9% recorded at the end of Q3 2019.
Shareholders Won
The improvement in overall wealth is quite widespread when we consider that 69% of Canadians own homes, according to Statistics Canada. However, not as many dispose of investment portfolios. In 2016, still, only 10.7% of households held investment funds and 7.3% held stocks, according to StatCan numbers. Of course, the percentage moves up with income. In the lowest income quintile, investment fund and stock ownership stood at 4.6% and 7.3 % respectively, in the highest quintile, at 17.5% and 15.7%. In the middle quintile, holdings were at 11% and 6.1% respectively.
Where the K-shape Comes In
So, it is a patchwork. A majority benefited from the strong housing market, but only a minority profited from the ride in stock markets. And there are still a lot of holes. “Not all Canadians benefit from those factors equally, notes Marks. We see inequality in how Canadians are benefiting from the recovery. We’ve also seen a disproportionate amount of job losses in certain groups such as women, low-income workers and visible minorities. Although we’ve recovered 2 million of the 3 million job losses, there are still 1 million jobs that have not yet recovered and some may become permanent job losses. So while some Canadians may not be worse off than before the pandemic, there is a large part of our population that is still suffering from its impact.”
And those who have been suffering under debt may only be experiencing temporary relief, notes Bushmeneva: government income support measures boosted disposable income. “As a result, she points out, income growth outpaced debt accumulation,” a boost that found its way to debt reduction. “Even the lower income levels benefited from government programs, sometimes getting more than they would have gotten in the job market.”
What remains to be seen is the extent and force of a second COVID wave that is building up, and if government support programs will be extended. Thanks to the experience gained from the first coronavirus round during which governments were “building the plane as it was flying”, we can hope that the impact will be smaller than in the first wave. But until further notice, it’s reassuring to be able to say: so far, not too bad.
:quality(80)/cloudfront-us-east-1.images.arcpublishing.com/morningstar/5WSHPTEQ6BADZPVPXVVDYIKL5M.png)
:quality(80)/cloudfront-us-east-1.images.arcpublishing.com/morningstar/Q3KIND5VXRCNHHH6JQHCCYBSSA.png)
