Canadian real estate sent household net worth soaring over the past few years, and now it’s taking some of it back. RBC Economics warned investors this week that the housing-fueled wealth boom is coming to an end. The last quarter showed the biggest drop in net worth on record, largely due to a housing correction. In the coming quarters, they expect to see net worth erode even further, causing households to pull back on spending, and delivering a larger hit to the economy.
Canadian Real Estate Sent Household Wealth Soaring
Canadian real estate helped drive a massive gain in household wealth over the pandemic, largely due to real estate. Home values soared 52% higher and helped to drive a $3.9 trillion increase in household wealth over the pandemic. Rising interest rates and a looming recession are expected to help reverse some of those gains.
Canada’s Largest Bank Expects Household Wealth To Roll Back
RBC is forecasting a significant reversal of household wealth, though they don’t see all of the gains rolling back. The decline in real estate reduced net worth by $900 billion in Q2 2022, the largest decline on record.
By the end of this year, Canadian households are forecast to see their net-worth drop by $1.1 trillion. In total, the recession is expected to retrace 41% of wealth gained since 2020, or about $1.6 trillion in lost net worth. It’s a big pull back, but wouldn’t be close to rolling back all of the gains made over the pandemic.
Falling Asset Prices To Slow The Canadian Economy
Just because all pandemic gains won’t be lost, doesn’t mean it won’t be a problem for the economy. Rising wealth tends to produce something called a “wealth effect” — people spend more because they feel rich. Similarly, a negative wealth effect happens when asset values fall, and people begin to tighten the budget. The reduced spending is hard to predict since it’s a behavioral response, but the more nervous people are, the less they spend, and the bigger the hit to the economy.
“While that still won’t retrace all of our pandemic gains, it will nevertheless create a negative ‘wealth effect’ that will drag on consumer spending, even as labour markets soften,” said Nathan Janzen, assistant chief economist at RBC.
Source: RBC Economics.
Rising interest rates and supersized home prices are also expected to further wear into home prices. “We estimate households will soon have to allocate 15% of their take-home pay just to debt servicing, with half of this attributed to mortgage costs,” he adds.
Earlier this year, the bank said they expect home prices to erode significantly over the next year. They went so far as to forecast the next correction will be the largest on record, with pricey cities like Toronto and Vancouver taking the biggest hit.
They aren’t alone. Oxford Economics has warned of a global real estate correction, with Canada leading the way lower. Meanwhile, BMO is also warning of a historic home price correction, but thinks there will be opportunity for buyers — so don’t just rush in.