Canadian Economys K-Shaped Recovery: Lower Earners Face Insolvency While Homeowners' Wealth Soars

As Canada faces a second wave of the COVID-19 pandemic , an ugly reality is emerging: For some households, the pandemic means the prospect of financial ruin, while for others it means extra cash and soaring property values.

In a report issued Wednesday, real estate brokerage Royal LePage said the shutdowns meant many earners have less to spend on and so have decided to put that money into real estate. Despite the steepest economic downturn since the Great Depression, Canadian house prices have soared, with the aggregate price up 8.6 per cent over the past year to $692,964, by Royal LePage’s estimate.

“Typical consumption patterns have been disrupted in 2020 as the pandemic has driven the household savings rate to levels not seen in decades,” Royal LePage CEO Phil Soper said in a press release.

“Most Canadians have sharply reduced spending on discretionary goods and services involving a great deal of human interaction, and with mortgage rates at record lows, many have refocused on housing investments, be it renovations to accommodate work-from-home needs, a recreational property or a new property better suited for the times.” 

Watch: Growing inequality in the COVID-19 crisis. Story continues below.

For this group of Canadians, things are about as good as they could be under the circumstances. Canada has seen the fastest house price growth of any G7 country during the pandemic, according to an analysis at Better Dwelling.

But for Canadians at the lower end of the income ladder, wealth isn’t accumulating debt is. Nearly half of Canadian households 47 per cent said they were $200 or less away from insolvency in the third quarter of this year, up from 43 per cent in the early months of the pandemic, according to the latest quarterly survey from insolvency firm MNP. A full 26 per cent said they are already effectively insolvent.

MNP’s debt index a measure of how well households can handle their debt dropped to its second-lowest level, higher only than in March of this year, at the start of the lockdowns.

Among Generation Z, the youngest adults today, things are even more precarious, with 69 per cent saying they are less than $200 away from insolvency. One-third of this group say they are already insolvent.

The financial pressure of the crisis is falling disproportionately on “younger Canadians, women, renters, and lower-income earners (who) are more likely to find themselves in trouble during this K-shaped recovery,” MNP said in a statement .

A “K-shaped” recovery means some parts of the economy rebound from the crisis while others continue to struggle.

In the early months of the pandemic, some economists argued the recovery would be “V-shaped” activity would drop steeply, but bounce back just as steeply once the pandemic is over. Others predicted a “U-shaped” recovery, in which the economy would spend longer in the doldrums before recovering.

But now many observers argue we are seeing a “K-shaped recovery,” in which some parts of the economy and some people recover, while others struggle. 

“Over the course of the pandemic, Canadians have been encouraged to believe that ‘we are all in this together,’ but it has become clear some groups are better equipped to weather the storm better than others,” said Grant Bazian, president of MNP Ltd.

“This important distinction may not be apparent on the surface, but it becomes very obvious in our research.”

‘Negative social consequences’

One impact of this two-speed recovery is that people at the lower end of the income ladder could find themselves facing increased housing affordability problems a problem that worries Royal LePage.

“Young adults are less likely to have been the homeowners who watched real estate equity build over the past few months. Many have lost their jobs during the pandemic,” Soper said. 

“If policy makers do not make increasing the supply of homes for rent or purchase a priority, there will be negative social consequences for years to come. COVID-19 has stimulated the demand for additional housing in ways that few could have foreseen.”

Others have suggested new taxes on earners at the top end of the income ladder, and on those businesses that have seen their profit margins soar in the pandemic.

Among other things, the federal NDP has called for an “excess profit tax ” on companies that earn above a certain percentage, as well as a wealth tax on fortunes over $20 million.

“Right now, we’re seeing grocery store owners increase their profits by billions during a pandemic, while their workers are fighting for a fair wage so they can afford to buy food. That is wrong,” federal NDP Leader Jagmeet Singh said in a statement last week.