Canadians could see their collective net worth drop by $1.6 trillion during the pandemic, RBC said.

Canadians could see their collective net worth drop by $1.6 trillion during the pandemic, RBC said.

The surge in net wealth that many Canadians enjoyed during the pandemic has come as their home values ​​have risen and high-flying stocks have bolstered their investment portfolios, according to RBC Economics.

The downturn in the real estate and financial markets means Canadians could wipe out a total of $1.6 trillion in net wealth in the coming quarters, the bank said in a report released Wednesday. While that won’t wipe out all the estimated wealth gains made during the pandemic, it’s already having a chilling effect on consumer spending.

From peak to trough, RBC estimates it represents a 41 percent decline in net worth.

“Still, for the most part, the sharp decline in net wealth is beginning to emerge,” the report said.

“Families can finance spending from current income or by drawing from their net wealth. As a result, when their net worth decreases, so does their confidence in spending.”

Economists commonly refer to this phenomenon as the wealth effect, which means that when a person simply feels that they are richer due to higher asset values, they are more likely to spend money. The opposite is true when people feel less rich.

During the pandemic, historically low interest rates helped fuel housing market activity that drove home prices higher. Stock markets also hit record highs as investors expected lower rates to help boost profitability. RBC estimates net worth in Canada increased by $3.9 trillion from the last quarter of 2019 to the first quarter of this year.

However, interest rates have risen rapidly during 2022, which has led to a decline in the real estate sector and a tightening of investor sentiment in the financial markets.

RBC says Canada’s net wealth fell by $900 billion in the second quarter alone, the fastest pace on record.

Because Canadians are reluctant to open their wallets, the economy is set to be affected.

“Discretionary or non-essential spending on things like home furnishings and renovations drove the pandemic spending boom. But as interest rates and price pressures continue to rise, Canadians will increasingly prioritize necessities like groceries and gas — and debt,” the report said.

“We estimate that households will need to allocate 15% of their take-home pay directly to debt servicing, with half of this allocated to mortgage costs.”

RBC recently moved up its call for a recession in Canada. It now sees a modest contraction in the first and second quarters of next year, a quarter earlier than previously forecast, as rising borrowing rates put pressure on household budgets.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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