Housing market slumps to erase $1.6T from Canadians
According to RBC Economics, the increase in net wealth that many Canadians saw during the pandemic as the value of their houses rose and high-flying stocks boosted their investment portfolios is now declining. The housing market no longer looks looming as it ones did.
According to the bank’s assessment, the real estate and financial industries’ decline will cause Canadians to lose a total of $1.6 trillion in net worth over the next few quarters. That won’t completely negate the predicted wealth increases brought on by the pandemic, but it is already having a negative impact on consumer spending.
True state of the housing market
According to RBC, the drop in collective net worth from peak to trough would be 41%.
However, the survey stated that “for the most part,” “the dramatic decrease in net wealth is starting to hit home.”
“Families have two options for funding spending: using current income or net worth. Because of this, when their net worth decreases, so does their confidence in their ability to spend.”
The wealth effect is the name economists give to this phenomena, which describes how people are more likely to spend money when they just believe they are wealthier due to increasing asset values. When people see a decrease in wealth, the opposite is true.
In the midst of the epidemic, historically low borrowing rates fueled a frenzy of activity on the housing market that drove up home prices. Investors anticipated that lower rates would increase profitability, which led to record highs in the stock markets. From the fourth quarter of 2019 to the first quarter of this year, according to RBC calculations, Canada’s net worth increased by $3.9 trillion.
The real estate industry has suffered a slump, and investor confidence in financial markets has soured as a result of the sharp increase in interest rates during the course of 2022.
According to RBC, the second quarter alone saw the quickest pace-ever decline in Canadian net wealth of $900 billion.
The economy will suffer as a result of Canadians’ reluctance to spend money.
The report stated that as interest rates rise and pricing pressures continue, Canadians would increasingly prioritize basics like groceries and gas—and debt—as opposed to discretionary or non-essential expenditure on items like house furnishings and renovations.
We predict that homeowners will eventually need to set aside 15% of their gross income for debt servicing alone, with mortgage payments accounting for 50% of this.
RBC has accelerated its call for a Canadian recession. A quarter sooner than anticipated, it now expects a modest downturn to occur in the first and second quarters of 2019 as rising borrowing costs strain household budgets.