As housing values tumble and financial markets weaken, households are facing a precipitous drop in wealth that will bite into consumer spending and economic growth, says RBC Economics in a new report.
Household wealth suffered its largest drop on record in the second quarter of 2022, plunging by $900 billion, and that’s expected to continue in the months ahead.
RBC projects that net wealth will drop by $1.1 trillion by the end of the year, and that it will decline by $1.6 trillion from peak to trough as rising interest rates continue to weigh on real estate prices.
This drop in wealth is expected to spill over to the rest of the economy as deteriorating wealth translates into lower consumption.
“For three decades prior to the pandemic, a $1 decline in home equity appears to have caused a roughly 1.3% decline in household consumption,” the report noted.
In the current environment, RBC projects that the “dramatic decline in net wealth, combined with rising prices and higher interest rates, will cut roughly $15 billion from household spending in 2023.”
“This is one of the factors that will drive Canada into a recession early next year,” it said.
However, notwithstanding the current drop in wealth and its negative effect on spending, households remain much better off than they were before the pandemic, the report also noted.
Robust fiscal and monetary supports, which were adopted to prop up markets and the economy after the onset of the pandemic, sparked a $3.9-trillion surge in wealth, “largely due to a real estate boom that drove home values 52% higher,” it said.
So, while some of these gains are now evaporating, households will still be wealthier than they were a couple of years ago.