Rising Interest Rates Widen Canada’s Income and Wealth Gap in 2023

In the third quarter of 2023, Canada witnessed a widening income and wealth gap, largely influenced by rising interest rates that adversely affected the lowest income and least wealthy households. This trend was highlighted in the latest Distributions of Household Economic Accounts report.

Key findings from the report include:

1. Income Gap Increases: The disparity in disposable income between the higher and lower income households expanded, with the gap between the top 40% and bottom 40% of income earners reaching 44.9%, up from the previous year.
2. Decline in Disposable Income for Lowest Earners: Households in the lowest 20% income bracket saw a decrease in their average disposable income, primarily due to a significant drop in net investment income. This group faced the dual challenge of reduced income and the inability to capitalize on higher returns from savings and investments due to limited resources.
3. Growth in Income for Highest Earners: In contrast, the highest income households (top 20%) experienced an increase in their average disposable income, driven by gains in wages and net investment income.
4. Net Saving Divergence: While the highest income households saw an increase in net saving, the lowest income households experienced a decrease due to rising costs of living, particularly in areas like transportation, health, and housing.
5. Wealth Gap Expansion: The wealth disparity also grew, with the wealthiest 20% of households holding a significant portion of the net worth. The least wealthy, comprising the bottom 40%, saw only a modest increase in their net worth.
6. Mortgage Debt and Real Estate Influence on Wealth: The least wealthy faced challenges in growing their net worth due to rising mortgage debt, which offset gains in real estate values. The wealthiest households, however, saw a more substantial increase in their net worth, largely due to gains in financial assets.
7. Youngest Households and Mortgage Debt: Households under 35 years of age were the only group to reduce their average mortgage debt, possibly due to a combination of affordability concerns and efforts to reduce existing debt balances.
8. Debt-to-Income Ratio Variances: The debt-to-income ratio was highest among core working-age households but declined for the youngest households, indicating a reduction in their overall debt burden.
9. Interest Rates and Debt Service Ratio: The impact of high interest rates was particularly felt by younger age groups, who, despite a lower debt-to-income ratio, faced increased costs in servicing their debt.

The report underscores the growing financial pressures on lower-income and less wealthy Canadians, exacerbated by rising interest rates and inflation. It highlights the need for effective strategies to address these widening gaps and ensure financial stability for all Canadians.

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