Households stacked cash, mortgage debt in Q2

“Today’s report largely reaffirmed that household finances remained in good shape through the third wave of the pandemic,” said TD Economics in a research note, which pointed out that household wealth continued to rise along with incomes and the savings rate.

Amid the rise in net worth, the household savings rate climbed to 14.2% in the second quarter, up from 13.0% in the first quarter.

StatsCan said that growth in savings was powered by stronger disposable income — driven by rising compensation and government transfers — and that the savings increase outpaced the growth in household spending, which was constrained by pandemic-related restrictions and economic uncertainty.

Some of Canadians’ savings were directed toward record levels of investment in new homes and renovations, StatsCan reported, but a large portion also went into financial assets, such as mutual funds and ETFs.

StatsCan said that mutual fund and ETF sales “have been higher than at any point prior to the pandemic,” compared with the past three quarters.

“This likely occurred because Canadians looked to put their savings into higher-yielding investments, as they potentially waited to direct some of this accumulated wealth towards future expenditures,” the agency said.

Total net worth for the household sector rose by $513.4 billion in the second quarter, hitting $14.2 trillion.

StatsCan said that households have added almost $3 trillion to their net worth since the start of 2020, as “Canadians have seen the value of their homes and investments rise considerably during the pandemic.”

Indeed, the value of financial assets rose by $380.1 billion in Q2 (a 4.6% increase), StatsCan noted. At the same time, liabilities rose by $72.4 billion, thanks primarily to a record increase in mortgage borrowing.

“Total credit market borrowing rose sharply to $63.8 billion in the second quarter, more than double the amount of borrowing in the first quarter, and well above the previous record set in the third quarter of 2020 (+$37.5 billion),” StatsCan said.

Most of the added borrowing (89.7%) came in mortgages, which totalled $57.2 billion, and amid a surge in demand — “as mortgage rules were tightened in June and rates remained low,” the agency said.

This record level of borrowing activity pushed total credit market debt (consumer credit, and mortgage and non-mortgage loans) to more than $2.5 trillion, comprised of more than $1.7 trillion in mortgage debt and almost $800 billion in other loans.

StatsCan reported that total mortgage debt has increased 10.8% since the first quarter of 2020, while non-mortgage debt has declined 0.8% over the same period.

Despite the surge in borrowing, the household debt-to-income and debt service ratios remained below their pre-pandemic levels, StatsCan said.

The debt-to-income ratio rose to 173.1% in the second quarter from 172.6%, whereas the debt service ratio decreased to 13.32% in Q2 from 13.45% in the first quarter.

Economists at Bank of Montreal noted that, while the household debt-to-disposable income ratio remains below its pre-pandemic level, the key metric increased at a record rate in the second quarter — highlighting the fact that “high household debt remains a key vulnerability to the Canadian economy.”

However, with low interest rates and rising incomes, debt servicing is “likely to remain manageable in the near term,” TD Economics said.

“Earlier this week, the Bank of Canada has kept the key interest rate unchanged and reiterated that the rate would remain at its effective lower bound until economic slack is absorbed. With the Delta variant dimming the outlook, the liftoff in policy rates is unlikely until at least the second half of 2022,” TD concluded.