A for sale sign is displayed outside a home in Toronto. The real estate share of total household assets has fallen lately to about 40 per cent from about 46 per cent in 2022, NBF’s numbers show.Carlos Osorio/Reuters
As ever in economic calamities, the quick and easy way to assess damage in the trade war is to see how much the stock market is falling. What’s happening with stocks tells us how financial markets see events, and how investors are affected in the moment.
But if you really want to gauge the wealth of Canadians, watch the housing market. In many parts of the country, it has been stunned into inaction. Sales are down sharply, and prices are flat or edging lower.
The housing industry spin is that sales are depressed only by uncertainty and will pop up like toast when the trade war is settled. Not talked about is the potential for a recession and how that threatens home prices.
The health of the stock and housing markets matters to all of us because of the wealth effect, a term that describes how people are influenced to spend by the state of their financial assets. The economy is already weakening – what it does not need at this point is a big pullback in consumer spending.
The recent plunge in the stock markets is a decisive thumbs down from investors to the tariffs applied by the United States on roughly 60 trading partners, including Canada. The markets were remarkably chill until U.S. President Donald Trump’s tariff announcement last week. It’s almost as if no one really expected him to follow through.
Stock markets aren’t just an abstract or elite indicator of household wealth. A recent report from National Bank Financial said exposure to stocks and investment funds that hold them made up about 25 per cent of total household assets at the end of last year. If you have even $100 in a bank mutual fund, you’re likely exposed to the recent stock market decline.
Like Americans, Canadians have unprecedented levels of stock market exposure right now. A big reason is the long bull market that appears to have been stopped dead by the trade war. Returns over the past five years have increased the value of investor holdings, and encouraged people to invest more.
NBF said a serious and sustained setback for stocks could negatively affect Canadian households at a time of increasing worries about jobs and the high cost of living. Declines in home prices would potentially be even worse.
The real estate share of total household assets has fallen lately to about 40 per cent from about 46 per cent in 2022, NBF’s numbers show. Housing wealth is especially important for households that aren’t in the high-income category, where owning stocks is more of a thing.
The importance of housing to our financial sense of well-being is more pronounced here than in the United States, which has about 27 per cent of total household assets in real estate. The sense of richness people all over Canada felt when housing surged in 2021 was intense – what happens if housing prices plunge?
We’ve already had a decline in average national home prices since the early 2022 peak, but it seemed bearable because the market was overheated and inaccessible to too many buyers. Further declines are likely to hit harder because they would come at a time when people are feeling financially dazed by the trade war.
The psychology of enduring big drops in the value of homes and stocks includes a fear factor: the feeling of loss and a feeling of shame that comes from the perception that we have made wrong decisions and been exposed. A lot of these feelings are overdone, though.
How we feel in the moment is not how we actually are in a broader sense. A big drop in the value of your stocks can be offset with holdings in bonds and cash, and by the recovery that follows literally every stock market plunge.
Financial anxiety related to declining house prices is amplified by the high value of homes. But owning a house that has fallen in price or worth less than you paid has zero relevance unless you must sell. As with stocks, you can ride it out.
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