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Canadians Households To See "Lower net worth, higher debt payments" - RBC

Economy Sep 13, 2022 11:46
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By Ketki Saxena 

Investing.com As per a report today RBC (TSX:RY) economics, the $900 billion wipeout in household net wealth seen by Canadians this quarter was the largest on record, and the first in two years. 

The contraction in household wealth in Q2 2022 was driven by lower property values and the less-than-impressive performance in equity markets. RBC does note however that the retraction only partially pares back pandemic-driven gains in household net worth, which still remains nearly $3 trillion higher than at the end of 2019. 

However, household wealth will continue to see an erosion in the months ahead, with RBC noting that “The pullback in home prices we expect alone looks set to lower household equity in real-estate by more than a trillion dollars from peak pandemic levels.” 

RBC also notes that rising rates are increasingly cutting into household net worth as the debt to income ratio and debt servicing ratios rise, causing “households [to] look and feel less wealthy, and will also increasingly cut into purchasing power.” 

In q2, the debt servicing ratio of an average Canadian household (the percent of current income required to service debt payments - was at 13.6%, below the pre-pandemic average of 15%. However, RBC notes that is because rising interest rates take the tie to catch up to all products in the market. RBC points to fixed mortgage rates, for example, as one that only resets when contracts are renewed.  

RBC’s base case for Bank of Canada now assumes overnight rates will be at 4% by December, with the debt servicing ratio overtaking its pre-pandemic peak to reach a record high of 15.5% by the end of next year. 

In Q2, the debt to income ratio of Canadians also rose, with Canadians now owing 1.82 dollars for every dollar of disposable income (StatsCan notes that this number edged up from 1.79 in the quarter previous). 

RBC notes that total debt has also risen: In q2 2022, despite a sharp rise in interest rates, total household liabilities rose by $69 billion driven by near-record increases in both mortgage loans and consumer credit. 

The bank's economists also expect that “labour markets will continue to soften at the same time and look for consumer demand to weaken significantly as lower income, higher borrowing and debt servicing costs squeeze their spending”, which will help ease inflationary pressures but induce a ‘‘mild’ recession in Canada next year. 

The bottom line? The average Canadian is becoming poorer, and there’s “more pain ahead [with] inflation, rising borrowing costs to squeeze household real earnings”

Canadians Households To See "Lower net worth, higher debt payments" - RBC
 

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