Economic slowdown to wipe out $1.6 trillion from Canadian wealth, mostly from home values: RBC
By the time the current housing slowdown and correction cycle comes to an end, it is expected a total of $1.6 trillion in Canadian wealth — mostly from home values — will be wiped out.
According to a market forecast update this week by RBC Economics, $0.9 trillion in value has already been lost from the housing market due to the accumulated impacts of the Bank of Canada’s hikes in interest rates, weakening financial markets, and growing inflation. By the end of 2022, this figure will grow to $1.1 trillion.
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But overall, Canadians will generally still be in a better wealth position than before the pandemic.
The decline of $1.6 trillion in wealth will represent a 41% rewind of the $3.9 trillion in peak net wealth gained throughout the pandemic, largely due to the real estate boom that sent home values up by 52%.
RBC Economics
RBC Economics expects households will soon have to set aside 15% of their work pay just to service their debt, with half of this being mortgage costs.
RBC’s data of its users suggest Canadian spending plateaued over the summer, after taking off in the spring after the COVID-19 variant-induced lockdowns in early 2022.
Data also shows purchases of discretionary goods, including furniture, have begun to decline, and it will have an impact on the manufacturing sector.
“This decline in household wealth will come at a time when Canadians are already feeling the squeeze of higher inflation and rising interest rates,” reads the bulletin.
“This is particularly the case for Canadians at the lower end of the income scale, who spend a larger share of their earnings on ‘non-discretionary’ or essential purchases like gas, food, and shelter. By contrast, higher-income households — still exercising pent-up demand following pandemic lockdowns — have continued to spend on non-essentials like travel and hospitality services. This has kept overall spending strong and added to inflation pressures.”
RBC expects Canada will enter into a recession starting in early 2023.