Higher interest, lower net worth for young Canadian homeowners

Last month, the Bank of Canada issued its sixth straight hike to the policy interest rate, which now sits at 3.75%.

Another increase is expected in December as the bank attempts to cool an inflation rate last seen in the early 1980s, when many Canadian homeowners—aged 44 and younger today—were toddlers.

Unlike in the early 1980s, when rates soared to over 18%, a steady decline in recent years saw rates hover not far above zero in 2020.

But for a considerable portion of the 44-and-under crowd these days, any breathing room from low interest rates to counter those high mortgage payments is now getting squeezed by this year’s rate hikes, even if they don’t eventually reach double digits.

For the first time in nearly two years, month-over-month increases in the cost of mortgage interest paid have been recorded from April through October 2022. This cost was up by 11.4% in October, compared with the same month in 2021.

Further, the average value of real estate declined by 5.2% in the second quarter of 2022 (April to June)—the first quarterly decline since 2018—and this has had an effect on younger households.

The average household wealth of the youngest age group (younger than 35 years) in the second quarter was $309,759, and $618,164 for those in the category of age 35 to 44. Both saw an identical reduction of 8.2%, compared with the first quarter.

Total net worth for all households was over $15.2 trillion in the second quarter, and those whose owners did not have a mortgage had over half (56.0%) of this wealth. Conversely, mortgage liabilities accounted for over four-fifths (83.1%) of all liabilities among households whose owner had a mortgage.

Other liabilities, such as credit cards, vehicle loans and lines of credit, totalled over $232.3 billion for households whose owner had no mortgage, a figure representing about three-fifths (60.9%) of the value of those whose owners had a mortgage.

Declining power of home equity as a driver of wealth?

Depending on the size of their down payment, younger homeowners will typically have more years remaining on their mortgages, and therefore less equity available.

Further, the recent decline in real estate value could, in some cases, mean a lower appraisal value—and possibly, lower equity available for homeowners seeking to tap that value for the first time to gain a home equity line of credit (HELOC).

And whether you’ve had a HELOC for a while or are just getting one, the recent rise in interest rates might add another bump in monthly payments, given that HELOCs (those that are not bundled with a mortgage) typically have variable interest rates.

Mortgage payments themselves are going up, whether as a renewal at a higher fixed interest rate, or for some variable-rate holders, a higher monthly payment triggered by the steady rise in rates.

So, what used to be a flexible, lower-cost method of consolidating higher-interest debt or financing home renovations to increase property values—and one’s own net worth—now costs more itself.

Inflation squeezing wage growth

We’ll wrap up this story the way we started—everything circles back to inflation. In April 2022, with headline inflation at 6.8%, nearly three in four Canadians reported that rising prices were affecting their ability to meet day-to-day expenses.

In the same month, young Canadians were among the roughly one-quarter of Canadians—also including lower-income earners, households with children, persons with disabilities and those belonging to racialized groups—who reported that they have had to borrow money from friends or relatives, take on additional debt, or use credit to meet day-to-day expenses.

More recently, although average hourly wages rose 5.6% on a year-over-year basis in October, yearly growth in consumer inflation hit 6.9% in the same month—outpacing wage growth significantly.