The Canadian property bubble is consuming the whole economy — and concentrating wealth creation. Household net-worth soared to a new high in the first quarter of 2021, according to Statistics Canada (Stat Can) data. Real estate represented over three-quarters of the gains in wealth, which is much higher than normal. Fanning the flames of the hot market means even more of the country now has its wealth concentrated in non-productive assets.
Canadian Households See Their Net-Worth Rise To $13.7 Trillion
Candian household net-worth has been soaring throughout the pandemic. The value reached $13.70 trillion in the first quarter, up 5.99% from the previous quarter. Over the past year, it’s increased by 21.50%, representing about $773.77 billion in gains. Stat Can only provides data for this series going back to 1990, but this is by far the largest annual rate of growth since then. It most likely goes back much further, since wealth growth by more than a fifth is highly unusual. Especially during a recession.
Canadian Household Net-Worth Annual Rate of GrowthThe rate of annual growth for household net-worth in Canada. Source: Stat Can; Better Dwelling.
Households Hold Over $7.1 Trillion of Wealth In Real Estate
The majority of those gains are due to real estate — the combination of land and residential structures. This segment represented $7.10 trillion of assets, or just over half of household net-worth. It increased by 9.16% from the previous quarter, and is up 20.87% from the year before. The combination of categories works out to $595 billion in gains from just the previous quarter.
Canadian Household Net-WorthThe dollar value of Canadian household net-worth, and its sub-component of real estate (land and residential structures). Source: Stat Can; Better Dwelling.
Household Wealth Creation Is Increasingly Concentrated In Real Estate
Real estate represents an unusually large share of gains for household wealth. They represented 76.96% of net-worth gains in the first quarter of 2021. It’s not always like this either, it’s the first time it represented such a large portion since 2018. Between 2018 and 2020, it represented a share of less than 40% of gains. The median quarterly share since 1990 is 34%, so the past three quarters above 40% is unusual. Over three-quarters in the first-quarter shows how exuberant the environment became.
We had some idea household net-worth in the first quarter was going to see a big boost from real estate. Home prices had been growing by multiples of household incomes, after all. Households are increasingly generating wealth through non-productive assets — as opposed to businesses.
Non-productive assets have a very different goal when stimulating the economy. Most of it is through a wealth effect, which is when people spend because they feel rich. Not necessarily because they have any more liquid capital than they did before. They feel if things went bad, they can tap their assets.
Whether this offsets the amount of spending lost by young adults is the question. In order for the next few generations to purchase a home, they need to save a lot more. This is going to mean a pullback in what circulates. If homeowners don’t make up the lost spending through a wealth effect, the wealth concentration gains are going to increasingly be a drag on the economy.
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