Canadian Household Wealth and Debt (Q4 2021)

Ksenia Bushmeneva, Economist | 416-308-7392

Date Published: March 11, 2022

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Households continued to benefit from wealth gains at the end of 2021 

  • Canadian household wealth continued to rise in the fourth quarter of this year, as growth in asset values outpaced growth in household debt. The value of household net worth increased 4.6% in Q4, and was up 30% since two years ago.   
  • The value of assets rose 4.2% in 2021 Q4, with broad-based gains across financial and non-financial assets. Non-financial assets advanced by 5.1% on the quarter, supported by rising prices of land and real estate. The value of residential real estate increased by 23% last year, accounting for nearly two thirds of the increase in household net worth during this time. The value of financial assets also rose on the quarter (+3.4%), benefitting from higher equity prices. 
  • The liabilities side of the balance sheet also continued to grow, but at slower pace than assets. Household debt rose by 1.8% (seasonally adjusted) on the quarter – on par with the pace seen in the third quarter of the year. Mortgage debt growth remained strong, leading the way at 2.4%. Growth in non-mortgage and consumer credit was much more moderate at 0.7% and 0.3%, respectively. The fourth quarter marked the second consecutive quarter of positive growth in consumer credit, which had declined earlier in the pandemic. 
  • The debt service ratio edged up to 13.8% (from upwardly revised 13.6% in Q3), as growth in debt payments outpaced disposable income, which declined in Q4. This marked the first increase in this metric in a year, but it still remains considerably lower than the pre-pandemic peak of 15%. 
  • A drop in disposable income in Q4 also led to a significant increase in debt-to-disposable income ratio. The ratio reached an all-time high level of 186.2% (up from 180.4% in the third quarter).    

Key Implications

  • Today's report re-affirms that households ended last year on solid financial footing, benefitting from continuous wealth gains and still-low interest rates. This year, however, households will face a trifecta of headwinds: rapidly rising prices, higher interest rates and weaker equity markets. Indeed, inflation was already red-hot prior to the Russia's invasion of Ukraine, which has since sent commodity prices soaring. As a result, inflation will be higher and longer lasting, chipping away at households' purchasing power. 
  • With the Bank of Canada on a mission to bring inflation lower, interest rates will rise this year and debt servicing costs – which have already ticked up last quarter – will follow suit. The Bank set that process in motion last week, increasing the overnight rate. It is not going to stop there, and is expected to deliver four additional quarter point hikes this year. Higher interest rates and consumer prices, will weigh on household finances and could squeeze discretionary spending. 
  • On the upside, households are facing those headwinds at the time when the labour market is tight and job vacancies are plentiful. This bodes well for job seekers as well as workers looking to boost their income. Rising employment and income will partially mitigate the impact of rising prices and debt servicing costs.