Deposits Jump 4.7% to $1.4 Trillion, But Not Enough to Offset 5.7% Dip in Value of Equities
TORONTO (September 10, 2019) – Investor Economics, a leading provider of research, data, and business intelligence to the global asset management community and a part of the ISS Market Intelligence division of Institutional Shareholder Services, today announced the release of the Household Balance Sheet Report, a biennial review and forecast of the state of Canadian household wealth and its impacts for the retail financial services industry.
After strongly expanding in the nine years following the 2008 bear market and financial crisis, growth in overall Canadian household assets slowed to 1.8 percent in 2018 (year over year) to reach $14.5 trillion. Discretionary financial wealth (“financial wealth”), whose main components include deposits, investment funds, and direct holdings of securities, suffered its first decline since 2008, contracting by 1 percent to end the year at roughly $4.4 trillion on the back of a 5.7 percent dip in the value of equities and a 3.7 percent retrenchment in the holdings of long-term investment funds.
“The final months of 2018 delivered a sobering message to Canadian households and the financial services industry alike, with market concerns over Brexit, a U.S.-China trade war, and other factors depressing asset valuations and prompting a rise in interest rates,” said Goshka Folda, President & CEO of Investor Economics. “This has translated into a sharper focus by Canadian households in diverting discretionary financial assets toward lowering personal debt with associated adverse impacts for the retail financial services industry.”
The effect of deleveraging was immediately felt by wealth managers and the retail banking industry. Beyond a documented reduction of inflows into investments, anecdotal evidence suggests that many households began redeploying money previously accumulated in order to pay down debt. With rising rates, many investors have moved out of high-interest savings accounts yielding around 1 percent to pay down their HELOCs costing them 4.25 percent on average.
As part of this savings allocation and reallocation process, Investor Economics estimates that in 2018, at least $45 billion additional dollars were directed toward debt repayment, that is, above and beyond what households would have typically repaid had the interest rate, regulatory and market environment not changed. From the perspective of the retail financial services industry, this could be viewed as a direct reduction in the addressable market for the wealth management and banking industries in 2018.
The current edition of the Household Balance Sheet Report projects that the aggregate household financial wealth of Canadian households will expand at an average annual rate of 5.6 percent over the coming decade, compared to 6.7 percent between 2008-2018. “Canadian households are a decade removed from the wealth destructive power of the 2008 financial crisis but many are also a decade closer to their retirement,” said Folda. With the ownership of Canada’s household financial wealth dominated by retiree and pre-retiree households, households will face conflicting priorities of growing their retirement nest-eggs while managing both the investment risk and the significant debt burden.