Canadian stock prices fell significantly during the third quarter of 2008, resulting in a 3.2% drop in household net worth, equivalent to a decline of $191 billion, Statistics Canada reported Tuesday.

This was the largest percentage drop since the third quarter of 1998, when Canadian stock prices fell in response to the Asian financial crisis.

In comparison, household net worth in the United States fell 4.7% in the third quarter, their fourth consecutive quarterly decline.

Canadian equity markets were down by over 18% in the third quarter, as measured by the S&P/TSX composite index, which closed in September at 11,753, led by substantial declines in energy stocks. The corresponding loss in directly held equities, combined with the related loss in the value of pension and life insurance assets of households, was the principal factor behind the drop in net worth.

Also contributing were slower growth in residential real estate values and continued household borrowing. Total household assets fell 2.2% in the third quarter of 2008.

Household debt growth slowed in the third quarter, owing largely to lower new mortgage borrowing. Household debt (consumer credit and mortgages) relative to net worth edged up during the quarter. Households had 20.9 cents of debt for every dollar of net worth and $1.27 of debt for every dollar of disposable income.

Canadian financial institutions were also affected by the drop in equity markets in the third quarter. This resulted in a notable decrease in the value of their marketable securities.

The value of Canadian equities and mutual fund units held by financial institutions was down more than 16% in the third quarter. The decline in foreign equity markets had a similar effect on the foreign portfolio holdings of financial institutions, as the value of foreign investments fell by more than 6% in the third quarter of 2008.

Net foreign debt falls, led by Canadian direct investment abroad

Canada’s net foreign indebtedness (with tradable securities on a market value basis) declined to $14.6 billion in the third quarter. Robust foreign direct investment abroad was the major factor in the reduction of Canada’s net foreign debt. Direct investment abroad by Canadian firms rose by $30.6 billion to $593.7 billion, on the largest outflows by Canadian companies in four years. Global stock market declines also contributed to lower net foreign debt, as non-residents had larger losses on their Canadian equities than Canadian investors had on foreign stocks.
Reduction in net foreign debt contributes to the growth in national net worth

Even with the large decline in the household sector’s net worth, growth in national net worth (total assets less liabilities for all sectors) remained robust, with national net worth rising 3.3% in the third quarter of 2008. The growth in national net worth was attributable to a decline in net liabilities to non-residents and an increase in economy-wide non-financial assets (national wealth). This resulted in a per capita national net worth of $180,000, up from $174,800 in the second quarter of 2008.

National wealth amounted to just over $6 trillion, as growth accelerated to 2.8%, up from the second quarter, with gains in non-residential and residential real estate contributing to the increase.

IE