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Household Debt Ratio Increases In Second Quarter: Statistics Canada

National net worth rises amidst declining international investment position and housing prices

National net worth, the sum of national wealth and Canada’s net foreign asset position, edged up 0.2% in the second quarter to $17,646.3 billion, expanding at the slowest pace since the first quarter of 2020 and ending the string of strong quarterly growth that saw Canada’s national net worth climb by over $5.1 trillion since the end of 2019. By comparison, an increase of this magnitude took nearly a decade to materialize prior to 2020. Significant declines in both the value of real estate and Canada’s international investment position were counteracted by the continued expansion of natural resources wealth. National net worth per capita was nearly unchanged from the first quarter of 2022, edging up to $455,401 in the second quarter.

The total value of non-financial assets in Canada, also referred to as national wealth,

increased 1.7% to $16,771.1 billion in the second quarter. The value of residential real estate fell $446.3 billion to $8,655.6 billion, the first decline in value since the fourth quarter of 2018 and a marked slowdown from the $344.0 billion rise in the first quarter of 2022 as the housing market continued to cool amidst rising borrowing costs. Continued pressures on supply chains resulting from Russia’s invasion of Ukraine placed upward pressure on global commodity prices, as the value of natural resources in Canada (excluding land) jumped 31.2% from the first quarter to reach $2,407.2 billion in the second quarter. Since the start of 2022, Canada’s natural resource wealth has grown by almost one trillion dollars.

Canada’s net foreign asset position, the difference between Canada’s international financial assets and international liabilities, was down by $230.2 billion to $875.1 billion at the end of the second quarter. This was the second significant quarterly decline in a row. Both international assets and liabilities decreased substantially in the second quarter as global equity markets fell sharply. In the first half of 2022, Canada’s net foreign asset position fell by $627.6 billion, from the record high reached at the end of 2021.

Household savings rate declines as spending increase

In the second quarter, seasonally adjusted household compensation grew by 2.0% following a rise of 3.8% in the first quarter. On the other hand, lower transfers received from government (i.e., employment insurance and other benefits) coupled with higher transfers paid to government weighed on income gains. As a result, household disposable income rose 1.0% in the second quarter. At the same time, seasonally adjusted household consumption rose by 4.3% in nominal terms as an increase in the volume of real expenditures was significantly bolstered by price increases across the majority of consumption components, including food and non-alcoholic beverages and furniture and other furnishings. Overall, consumption outpaced disposable income in the second quarter, which pushed household net savings lower. The savings rate fell to 6.2% in the second quarter from an upwardly revised 9.5% in the first quarter. By comparison, the average savings rate over the decade prior to 2020 stood at 3.4%.

Chart 2 
Household savings rate, seasonally adjusted

Chart 2: Household savings rate, seasonally adjusted

Households sell off mutual fund shares after recording record inflows since the end of 2020 

Household net savings represent a source of funds that are available to increase non-financial and financial wealth through the purchase of assets and settlement of liabilities. After posting record levels of net inflows into mutual funds and exchange traded funds over the preceding six quarters, including a record inflow at the end of 2021, the tables turned as households recorded $11.0 billion in net redemptions of mutual funds shares in the second quarter of 2022.

Households added $41.9 billion of total currency and deposits in the second quarter, as their holdings of this asset neared the $2 trillion mark. With rising interest rates, households have been shifting their preferences towards fixed-term deposits such as guaranteed investment certificates. Higher returns combined with the relative security of fixed-term deposits is likely increasing their attractiveness to household depositors compared with other types of investments that are currently subject to more uncertainty.

Households’ net worth declines as households face trifecta of market challenges

Household sector net worth—the value of all assets minus all liabilities—dropped $990.1 billion in the second quarter to $15,215.3 billion, a decline of 6.1% from the first quarter. The contraction in household wealth was the largest decline on record as households were faced with challenging equity, bond, and housing markets, all of which pointed to lower asset valuations. This deterioration followed a period of strong growth beginning in early 2020 during which households saw their wealth rise significantly on ebullient housing and financial markets.

The value of households’ total financial assets fell for the second consecutive quarter, dropping by a record $530.6 billion in the second quarter as market turmoil broadened. This decline was compounded by a $389.8 billion drop in the value of non-financial assets, as the streak of gains in real estate that began in late 2018 was halted by a housing market grappling with rapidly rising interest rates. Financial liabilities increased by $69.8 billion during the second quarter of 2022 due to the continued expansion of outstanding mortgage debt and a rise in consumer spending, which fueled growth in non-mortgage debt.

Residential real estate values fall while borrowing costs continue to climb

The value of household residential real estate declined by 5.0% in the second quarter, more than erasing the gains from the 3.9% increase in the first quarter, but remained more than $2.3 trillion or 41.1% higher than the level recorded at the end of 2019. The value of residential land declined 8.7% in the second quarter of 2022, while residential structures posted a modest increase (+1.0%) as housing investment moderated in the quarter. The average resale price dropped by 10.5% from the first quarter to reach roughly $710,000 in the second quarter, while home resale inventory levels increased on a seasonally adjusted basis but remained at lower-than-average levels. By July, the average resale price dropped further to $635,000. On a year-over-year basis, there were 24.1% fewer home sales recorded in the second quarter, while the second quarter of 2021 saw the highest level of home sales on record.

Real estate as a percentage of household disposable income, an indicator of housing affordability, declined for the first time since the second quarter of 2020, reaching 546.7% in the second quarter of 2022; this compares with 581.3% from the first quarter of 2022 and 449.0% at the end of the fourth quarter of 2019.

Household financial assets hit by weaker equity and bond markets

The value of household financial assets tumbled by 5.7% in the second quarter, pulled down mainly by the depreciating values of debt and equity securities. Household wealth held through institutional investors such as mutual funds and insurance and pension plans shed a record $429.2 billion in value by the end of the second quarter compared with the first quarter, mainly as a result of downward revaluations (-$436.5 billion). This was the second consecutive quarterly decline in the market-value of these investments.

The Toronto Stock Exchange composite index (TSX) dropped 13.8%, following a 3.1% increase in the first quarter. By comparison, the Standard and Poor’s 500 (S&P 500), which is more weighted towards technology companies, dropped 16.4% in the second quarter, the second consecutive quarterly decline.

Also impacting financial asset values, bond prices recorded another significant drop in the second quarter, following a substantial decline in the first quarter, as yields for debt securities climbed higher. Higher interest rates generally translate into higher bond yields, meaning lower prices for fixed income securities. The second quarter marked a less common occurrence when both bond and equity markets declined substantially.

Household borrowing reaches near record pace

Chart 3 
Household credit market debt, seasonally adjusted flows

Chart 3: Household credit market debt, seasonally adjusted flows

On a seasonally adjusted basis, the pace of credit market borrowing accelerated from the first quarter, with households adding a near record $56.3 billion of debt in the second quarter. By comparison, households borrowed a record $61.6 billion in the second quarter of 2021, fueled principally by unprecedented demand for mortgages. Mortgages remained the largest contributor to the heightened market borrowing in the second quarter of 2022 with demand of $48.7 billion, while demand for non-mortgage loans posted two consecutive quarters of heightened activity (+$8.3 billion in the first quarter and +$7.7 billion in the second quarter) not seen since early 2018.

In terms of new residential mortgage funds advanced by financial institutions, which include chartered banks, the popularity of variable rate mortgages continued in the second quarter despite the rising interest rate environment. Variable rate borrowing represented over half (51.1%) of new funds advanced versus fixed rate alternatives in the second quarter, but by June this share was trending lower. Overall, variable rate mortgages represented nearly one-third (32.5%) of total outstanding mortgage debt in the second quarter, up from 29.8% in the previous quarter.

The stock of household credit market debt (consumer credit, and mortgage and non-mortgage loans) grew 2.1% to reach $2,760.3 billion in the second quarter, as a result of the robust borrowing activity. Apart from the second quarter of 2021, this was the fastest pace of growth in total credit market debt since the last quarter of 2009. Mortgage debt surpassed $2 trillion to reach $2,044.2 billion in the second quarter of 2022, while non-mortgage loans stood at $716.1 billion, marking a return to a higher level of debt last recorded in early 2020.

Ratio of household credit market debt to disposable income moves higher

On a seasonally adjusted basis, household credit market debt as a proportion of household disposable income increased to 181.7% in the second quarter from 179.7% in the previous quarter. In other words, there was $1.82 in credit market debt for every dollar of household disposable income in the second quarter. Although households’ disposable income was higher (+1.0%) in the second quarter, the rise was surpassed by stronger growth in household credit market debt (+2.1%).

Chart 4 
Household credit market debt to household disposable income, seasonally adjusted

Chart 4: Household credit market debt to household disposable income, seasonally adjusted

The household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, increased to 13.63% in the second quarter from 13.34% in the first quarter. Household disposable income before interest payments increased by 1.3% in the second quarter, while total debt payments rose by 3.5%. While variable rate mortgages are more sensitive to interest rate increases, fixed payment variable rate mortgages have leeway to absorb these higher borrowing costs without a concomitant rise in payments. Total interest payments represented 45.1% of overall debt payments in the second quarter, up from 43.8% in the first quarter. Overall interest payments expanded 6.6% in the second quarter compared with a 1.1% rise in obligated payments of principal.

Federal government demand for credit market debt slows

Chart 5 
Net debt (book value) as a percentage of gross domestic product

Chart 5: Net debt (book value) as a percentage of gross domestic product

The federal government demand for credit market debt was $11.6 billion in the second quarter, a deceleration from the $19.1 billion of borrowing in the first quarter. This demand was composed of $19.9 billion in net issuances of federal government bonds, which were partially offset by net redemptions of short-term paper of $7.7 billion. This indicates a continued strategy of replacing short-term borrowing with longer-term debt, which can help lock in lower borrowing costs when rates are rising.

The Bank of Canada recorded net redemptions of federal bonds of $13.0 billion in the second quarter, the second consecutive retirement after seven quarters of sizeable net purchases, as the central bank ended the reinvestment phase of its asset purchase program and began quantitative tightening, ceasing purchasing bonds under the program and letting Government of Canada bonds mature without replacement.

Other levels of government (excluding social security funds) recorded net debt repayments for a second consecutive quarter in the second quarter. Net issuances of short-term paper (+$5.0 billion) were more than offset by net redemptions of government bonds (-$8.0 billion) in the second quarter.

Debt to gross domestic product declines as continued economic growth outpaces borrowing

The ratio of federal government net debt (the book value of total financial liabilities less total financial assets) to gross domestic product (GDP) declined to 35.4% in the second quarter from 36.8% in the first quarter, while the ratio of other government net debt to GDP fell to 22.3% from 23.3% over the same period. Growth in GDP combined with an overall reduction in government net debt mainly drove the ratio’s decline.

Upswing in private non-financial corporations’ demand for non-mortgage loans

Chart 6 
Demand for funds by private non-financial corporations

Chart 6: Demand for funds by private non-financial corporations

In the second quarter, the demand for funds by private non-financial corporations moved slightly higher to $20.9 billion from $20.5 billion in the first quarter. Borrowing was mainly in the form of non-mortgage loans (+$36.5 billion) and mortgage loans (+$7.3 billion). This was partially offset by a net redemption of bonds (-$12.6 billion) and listed shares (-$11.4 billion). Listed shares have recorded their largest six-month cumulative net redemption on record reflecting a mix of merger and acquisition activity and share repurchases. At the same time, private non-financial corporations recorded the highest demand for non-mortgage loans since the start of the COVID-19 pandemic in the first quarter of 2020.

Private non-financial corporations’ mineral and energy reserves, which are significant components of their natural resource wealth and net worth, increased by 35.7% from the first quarter of 2022 to reach $1,765.1 billion in the second quarter of 2022, the second consecutive quarter of strong growth. This was primarily the result of rising energy prices, which pushed up the value of Canada’s resource wealth. Additionally, strong demand for coal and potash also contributed to the increase.

Financial sector supply of funds increases

Chart 7 
Lending by the financial sector

Chart 7: Lending by the financial sector

Financial corporations delivered $171.9 billion in funds to the economy through financial market instruments in the second quarter, an increase of $96.7 billion from the previous quarter. The supply of funds was primarily in the form of mortgage (+$60.5 billion) and non-mortgage (+$55.6 billion) loans, as well as Canadian bonds and debentures (+$33.8 billion).

The market value of financial corporations’ financial assets decreased 3.8% to $19,418.0 billion by the end of the second quarter, driven by declines in the value of equity (-$891.8 billion) and debt securities (-$66.8 billion).

The financial assets of mutual funds, whose wealth is principally held by households, declined for the second consecutive quarter, falling $345.8 billion to $2,898.5 billion in the second quarter. Net redemptions of mutual fund shares totalled a record $18.9 billion, despite net inflows into money market mutual funds of $4.1 billion, as investors adjusted their investment strategies in response to volatile markets.

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