July 02, 2021 | 13:03
The Wall of Wealth
The Wall of Wealth
It’s well-known that households built up a tremendous cache of extra savings during the pandemic, estimated at $220 billion in Canada. But that figure only scratches the surface on the extent to which the overall household financial position has strengthened since the start of 2020. The latest quarterly national accounts revealed that Canadian household net worth rose by an astonishing $2 trillion during the pandemic (i.e., in the five quarters from 2019Q4 to 2021Q1). That represents a titanic 17% increase to $13.7 trillion, equal to 933% of disposable income—up 50 ppts from 2019 levels, and double the ratio thirty years ago (Chart 1). U.S. household wealth has also seen a big boost in the face of the past year’s tough economic backdrop, but both the increase and the wealth-to-income ratio are even more overwhelming in Canada.
Breaking down the components of net worth reveals that the surge in home prices has played the single biggest role in boosting household balance sheets. A jump in non-financial asset valuations (mostly real estate) alone accounted for nearly two-thirds of the rise in overall assets. The fact that Canadian home prices started at higher valuations than their American counterparts, and have risen even more quickly in the past year, explains the gap in net worth between the two nations. Even so, the jump in financial assets and net worth has also been impressive (Chart 2). Since the end of 2019, Canadian financial assets have surged $720 billion, or up 9.6% to above $8.2 trillion, dwarfing the rise in household debt over the same period. The spread between the two represents net financial assets, and this key figure has leapt by more than $600 billion (or almost 12%) in the pandemic, or almost three times the widely reported boost in excess savings.
Digging deeper into what’s powered the rise in financial assets reveals three main and broadly equal drivers (Table 1). First, currency and deposits are up by nearly $210 billion, lining up well with the estimated rise in excess savings. (Aside: Personal savings are derived from a completely different set of data, looking at the difference between estimated income and spending, and it’s frankly amazing the two figures are so close.) Second, equity and investment fund shares (i.e., mutual funds, ETFs) rode the wave of record global stock markets to a $290 billion increase. Third, life insurance and pension values have been driven up $218 billion by the broad-based advances in financial markets. To recap, these have combined to boost household financial assets by more than $700 billion, while net new borrowing has risen a much smaller $112 billion, lifting net financial assets to $5.7 trillion, or 4 times disposable income.
Towering over the gains in financial wealth since the pandemic is the even larger advance in real estate valuations. Total non-financial asset values have surged 21% during the pandemic, lifting them by $1.4 trillion, or by more than 10 times the increase in household debt during that period. These assets are still slightly smaller than financial assets, but the ratio is now 49/51. The run-up in prices has also lifted homeowner equity in their homes to a record high of 76.5%; stated another way, the aggregate home value-to-loan ratio is now above 4.25, up from 3.75 a decade ago. While the spirited comeback in U.S. home prices has also fired up the share of homeowner equity there as well, Canada remains well north (Chart 3). However, the U.S. experience during the 2007-12 meltdown also clearly shows in gory detail how these gains can prove ephemeral, and why we focus on financial assets.
What are the implications of this massive build-up in household wealth?
Final word: Appreciating that the wave of statistics on this topic can seem overwhelming, and some of the massive figures can be numbing, let’s boil it down to one specific set of figures. Total Canadian household assets have risen 15% during the pandemic to above $16 trillion. This figure towers at 6.5 times the level of household debt, which normally hogs all the attention. Moreover, with around 15 million households in Canada, this implies that the average household now has more than $1 million in total assets, and is nearly there even after netting out debt. Clearly, averages hide as much as they reveal, and the median net household worth would be far lower. Even so, the fact is that household wealth has more than doubled since the past cycle, and tripled just since the dot-com boom at the start of the century—an amazing outcome in the wake of a deep recession.