Canadians must be hoping for a recession every year, since they’ve never made more money. A National Bank of Canada (NBC) analysis shows household wealth surged in Q2 2021. Their wealth actually surged so fast, the ratio of debt hasn’t looked smaller in almost 2 decades. The bank expects this to fund a significant spending boom, as people feel wealthier. There’s just one problem — a bank exec warned housing wealth might be “exaggerated.”
Households Have Seen Assets Rise 23% Since The Pandemic Started
Statistics Canada (Stat Can) data shows household asset values soared this year. The value of assets increased 3.6% in Q2 2021, the fifth consecutive quarter to rise. NBC found households have now gained 23% from the Q1 2020 low, after the pandemic hit. “This 4 standard deviations jump is by far the quickest turnaround since data recording began,” said Matthieu Arseneau, NBC’s chief deputy chief economist.
Canadian Debt To Assets Falls To Nearly Two-Decade Low
The unprecedented (drink!) increase in asset values has the relative size of debt looking smaller. The debt to asset ratio dropped below 16% last quarter, the lowest it’s been since the early 2000s. NBC sees this producing a “wealth effect” — when people feel rich, they spend more. Often taking out more debt to finance it, since they have little relative to the size of their assets.
BMO’s Chief Risk Officer Warned Home Equity Might Be “Exaggerated” Earlier This Year
The rise in asset values might sound encouraging, but one of the Big Six banks dropped a pin for that bubble. In May, BMO Chief Risk Officer Patrick Cronin told investors about the bank’s new risk procedures. While doing so, he said “The elevated home prices may exaggerate LTVs and so, we’re taking our risk management practices on housing dynamic…”
That statement might not mean much to the average person, but he’s saying home equity might be unreliable. The housing boom created significant equity with little actual financial contribution from owners. They aren’t sure how secure those gains are, and definitely aren’t willing to bet on them. Consequently, they need to adopt new risk procedures due to this “exaggerated” equity.
Ultimately, that won’t stop the wealth effect NBC’s economists are talking about. Most people think they’ve hit the jackpot, and their equity is here to stay. If you live in a million-dollar home, why not get a new expensive truck to go in the driveway? Maybe an ATV, or a Ski-doo for the cottage? You’re a part of the rich now, right? Just like the other 60-something percent of households that are homeowners, apparently.
If home equity does prove to be exaggerated, these households are in a worse situation. Not only was their equity fleeting, but they spent a bunch of money because they thought they were rich.
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