Canadian net wealth soared in 2021 but indebtedness is also at a record high

Household net wealth ended the year with a bang, rising to a record $15.9 trillion in Q4—a stunning $3.6 trillion above pre-pandemic (2019/Q4) levels. A 5% jump in financial market assets in Q4 will probably be partially dragged down in Q1 as stock markets soften. But more than half of the net wealth gains (57%) over the last two years have come from surging real-estate values that pushed up household equity in real-estate. We look for that momentum to flow into Q1 as home prices continue to rise.

Household debt levels are also at record levels, largely because heated housing markets have also driven more mortgage borrowing. Mortgage debt rose another $44 billion in Q4/2021, and is up over $300 billion from pre-pandemic levels. That, and a lowering of disposable incomes as government pandemic supports continued to ease, pushed the closely watched debt-to-income ratio to a new record of 186.2% in Q4.

Debt payments still low but rising

Those increased pandemic debts were built up at very low interest rates. As a result, payments associated with higher debt levels take up a smaller share of disposable incomes than normal. The debt payment-to-income ratio rose in Q4 but remained well below pre-pandemic levels at 13.8%. And over 73% of household debt is held in mortgages—a large share of which are fixed rate and won’t adjust immediately as market rates rise.

Higher interest rates are expected to push debt servicing costs higher as those loans are renewed. Disposable incomes are also expected to increase as strong demand and limited supply push wages higher. All told, we expect the household debt service ratio to continue to drift back towards pre-pandemic levels in 2023.

Household savings will help absorb higher interest rate costs, but are unevenly held

Earlier this month, the Bank of Canada hiked interest rates for the first time since 2018. It’s expected to follow that up with another hike in April. Though the Russian invasion of Ukraine has sharply increased geopolitical uncertainty, higher global commodity prices are adding to already firm inflation pressures. And labour markets are too strong to justify current emergency-low interest rates.

Households built a substantial stockpile of savings during the pandemic as government supports propped up incomes and COVID-19 restrictions curbed opportunities to spend. This savings trove is expected to help backstop household purchasing power even as interest rates rise and the war in Ukraine sends global inflation rates higher.

But this financial buffer has not been evenly distributed. For lower income households, savings balances did not move up appreciably, though these households borrowed less. With government pandemic supports winding down, borrowing on credit cards has picked up. And since lower-income households generally carry higher debt levels (relative to income) they tend to be more sensitive to interest rate increases. These households also spend a larger proportion of income on non-discretionary (energy and food products) items that are both essential and getting more expensive with the Russian invasion of Ukraine. We expect overall spending to remain firm with travel and hospitality purchases boosted by pent-up demand from those further up the income ladder. But the economic impacts of the pandemic continue to hit some harder than others.


Rannella joined the RBC Economics team in 2017 as an economist. She holds a Bachelor of Science (Honours) in Economics & Accounting from University of the West Indies, Master of Research in Money, and Banking & Finance from Lancaster University and a Master of Arts in Economics from the University of Guelph.

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