Canadian Household Wealth and Debt (Q1 2021)

Households balance sheets remain on a strong footing at the start of 2021 

• Building on last year's theme of resiliency, household balance sheets started 2021 on a solid foundation, supported by continuous wealth gains and ongoing government income support programs. Household wealth rose by 6.0% in Q1- the fastest quarterly gain on record, and was 21.5% higher than a year ago. 
• Wealth gains were supported by the appreciation of both financial and non-financial assets, with the latter leading the way. The value of non-financial assets (mainly land and real estate) surged by 8% on the quarter boosted by feverish activity in the housing market. As a result of this outsized gain, 40% of household wealth was concentrated in real estate, which is the highest share on record. By comparison, the gain in the value of financial assets were relatively modest, up 2.4%. Following rapid accumulation of cash and deposits in 2020, holdings of currency and deposits have remained flat at the start of the year, likely because households reallocated their savings into higher-yielding investment products.   
• The liabilities side of the balance sheet grew at a relatively modest pace, advancing by 0.7% on the quarter and up 4.3% from the year-ago. Growth in household debt was entirely due to growth in mortgage credit, which rose by 1.4% in the quarter (a deceleration from 2.0% pace in Q4). Non-mortgage credit balances were flat, while consumer credit balances declined 1.0% on the quarter as a result of renewed restrictions during the second wave of the pandemic which limited spending options. Compared to a year ago, consumer credit balances were 2.1% lower.  
• After rising in the previous quarter, the debt service ratio edged down in Q1 declining to 13.5% (down from 13.6%). The slight improvement in the relative cost of servicing debt was due to a gain in disposable income as well as lower payments of interest. Disposable income improved in Q1 due to an increase in government transfer payments amid tighter covid-19 restrictions. Overall, transfer payments and, consequently, disposable income remain elevated and interests rates are lower than they were prior to the pandemic. As a result, relative to disposable income, debt servicing costs remain significantly lower than they were a year ago. For comparison, at the same time last year, households spent on average 15% of their disposable income to service debt. 
• An uptick in disposable income last quarter also led to a modest improvement in household leverage. Debt-to-income ratio ticked down to 172.3% from 174% in Q4. The ratio is 8.0 points below its pre-pandemic level in 2020Q1.  

Key Implications

• Household sector kicked off 2021 in a strong financial shape. Wealth gains continued with vengeance, supported by outsized improvements in the housing market, while growth in debt eased off somewhat. At the same time, the savings rate and disposable income have both ticked up, keeping the relative cost of servicing debt low. 
• On the consumer side, credit balances may not continue to trend lower for much longer. Limited spending options during lockdowns combined with government income support payments allowed households to pay down existing debt loads faster than they were accruing. However, easing public health restrictions will lead to reduced government support and some normalization in spending habits suppressed during the pandemic. As such, households may begin accumulating consumer debt once again. 
• Low interest rates have also made debt servicing costs more manageable. While household debt is 4.3% above its year-ago level, interest costs are 9.0% lower. In this week's announcement the Bank of Canada has kept the key interest rate unchanged and reaffirmed its commitment to hold the policy interest rate at the effective lower bound until economic slack is absorbed and the 2 percent inflation target is sustainably achieved. The Bank expects this to happen sometimes in the second half of 2022. Still, interest rates could rise sooner than anticipated if the economy and labour market outperform expectations and inflation remains elevated.     

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.