Higher interest rates continue to have a negative impact on the country’s least wealthy households
Income and wealth gaps in Canada saw a considerable annual increase in Q3 2023 as higher interest rates continue to have a negative impact on the income and net worth of the lowest income and least wealthy households, according to the national statistics agency.
During the third quarter, the disparity in disposable income between households in the top 40% and bottom 40% of households reached 44.9%, marking a 0.5% annual increase.
Statistics Canada said that the most noticeable shift was registered among the lowest income households (the bottom 20% of the income distribution), with this cohort seeing a year-over-year decrease of 1.2% in average disposable income during the third quarter of 2023. Despite a 3% rise in average wages and salaries, these gains were offset by a substantial 43.4% reduction in net investment income.
“While higher interest rates can lead to increased borrowing costs for households, they can also lead to higher yields on saving and investment accounts,” StatCan said. “The lowest income households are more likely to have a limited capacity to take advantage of these higher returns, as on average they have fewer resources available for saving and investment.”
RBC Economics study shows Canadian spending slowing due to debt pressures. While spending is steady, early signs of weakness coincide with a slight unemployment rate increase.https://t.co/r5amlMW8vO#mortgagenws #mortgageindustry #householddebt #economy
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 11, 2023
The central bank’s current policy rate had a huge role in these market dynamics, StatCan noted.
“Higher interest rates weighed on average disposable income for the lowest income households in the third quarter,” StatCan said. “Along with a doubling of the Bank of Canada’s policy interest rate from 2.5% in July 2022 to 5% as of July 2023, net investment income declined for the lowest income households in the third quarter of 2023 relative to a year earlier.
“The lowest income earners reduced their net investment income as increased interest payments, more than half of which was due to consumer credit, outweighed gains in investment earnings.”
On the other end of the spectrum, the average disposable income of the highest income households (top 20% of the income distribution) surged at the fastest pace of any income group in Q3 2023, with a 3.2% annual increase. StatCan said that this was mainly propelled by gains in wages (up by 5.7%) and net investment income (up by 9.9%).
“The highest income households were the only group to increase their net investment income, as gains in investment earnings were greater than increases in interest payments in the third quarter of 2023,” StatCan said. “Almost 75% of the increase in interest payments for the highest income households was due to mortgage debt, compared with less than half for the lowest income households.”
