Canadians are investing less, opting instead to use their savings to pay down their debts.
It’s the first decline in Canadians’ financial wealth since the 2008 recession, according to the 2019 Household Balance Sheet Report released on Tuesday by Investor Economics, a financial services industry research company.
The term “financial wealth” refers to a country’s deposits, investment funds, and direct holdings of securities.
The debt-to-income ratio in Canada has been on the rise over the last decade. The report’s findings might be reassuring if Canadians’ debt was going down overall — but that's not the case, says Carlos Cardone, senior managing director of Investor Economics.
“Baby-boomers focused on debt reduction will be counterweighted by younger demographics entering their debt-taking years,” Cardone told the Globe.
According to the report, an additional $45 billion in savings was diverted toward debt repayment in 2018, on top of what Canadians would have already repaid if interest rates and the market had remained unchanged.
But rising interest rates prompted many people to move money out of their high-interest savings accounts in order to pay down personal debt. The Bank of Canada raised its overnight interest rate three times in 2018.
The overnight interest rate is the rate at which banks can borrow money from the central bank. It determines what interest rate banks can attach to variable-rate products, such as home equity lines of credit (HELOCs).
According to Cardone, HELOCs cost around 4.25% to service, whereas a high-interest savings account typically earns about 1% of interest. Meaning, Canadians may have been paying more interest in servicing the debt than they were earning on their savings.
“This is money that is not going into financial assets – including money not going into tax-free saving accounts and registered retirement savings plans.”
Global economic uncertainty may have also been a factor in pushing people to tackle their debt.
“The final months of 2018 delivered a sobering message to Canadian households and the financial services industry alike...” Goshka Folda, president and CEO of Investor Economics, told the Globe and Mail, referring to the escalating U.S.-China tariff war and Brexit concerns.
“This has translated into a sharper focus by Canadian households in diverting discretionary financial assets toward lowering personal debt.”