Housing Provides 'Passive' Savings as Canadians' Debt Rises by Jim Adair
Canadians are not saving their money these days -- in fact, they are spending more than their disposable income, according to Statistics Canada. But household net worth continues to rise, fuelled by the housing market and equity gains. "Households' appetite for debt grew with demand for consumer credit and mortgage funds" in the last quarter of the year, says a Statistics Canada report. "Supported by sustained low interest rates, the growth in total household debt continued to outpace that of personal disposable income … Canadian households carry about $1.08 in debt for every dollar of their disposable income." The personal savings rate was below zero in the last quarter, says Statistics Canada, but "even though saving was negative, household net worth continued to advance (+1.8 per cent) at a stronger pace than in the previous quarter," says the federal government agency. "Overall, the increase in the value of residential real estate accounted for more than half of the increase in national wealth in the quarter," it says. "Strength in the resale market and renovation activity, as well as more modest growth in new home construction, contributed to growth in residential real estate." The fact that Canadians are saving their money "passively" through gains in the real estate market, rather than actively making financial savings, could be cause for concern, says Benjamin Tal, a senior economist with CIBC World Markets. "Canadians of all age groups are not saving enough actively by putting money aside for a rainy day," says Tal. "How much savings is enough is a matter for debate, but most Canadian households would likely benefit from building a little nest egg." In a recent report, Tal agrees that real estate values are working to compensate for the lack of active savings. "But is it a healthy equilibrium? While we do not foresee a major correction, the real estate boom is already in its eighth inning, and a leveling off in house prices will strip households of one of their most important means of savings. Furthermore, real estate is hardly a perfect substitute for old-fashioned savings. After all, real estate-based savings are highly illiquid and selling a home is often an inconvenient and expensive transaction." While the current value of personal liquid assets (chequing and demand deposits, mutual funds, directly held stocks and bonds) is currently at a record high, Tal says more than 80 per cent of the increase in balances in personal savings and chequing accounts since 2001 were made by people aged 50 and over. "Since the excess liquidity is concentrated among a relatively narrow group with little outstanding debt, increased household liquidity … serves neither as a real buffer against growing debt nor as a counter to illiquid savings via the housing market," he says. Outside of real estate holdings, young and even middle-aged Canadians are not saving enough, either actively or passively, Tal says. The CIBC World Markets study also says that at least 40 per cent of Canadian households have no financial savings outside of their personal savings and chequing accounts. The average house price in Canada has risen by almost 50 per cent since 1997, and the increasing value of real estate stimulates consumer spending and contributes to higher debt. Tal says this "housing wealth effect" has generated $20 billion in extra consumer spending since 2002, but it has also contributed to household debt. Canadians have been eager to put their financial resources in the housing market because of an extended period of low interest rates. There's less incentive to save when borrowing is less expensive and financial assets generate lower interest, says the CIBC study. Tal says that the current low interest rate environment is expected to continue, "and even after the Bank of Canada's current tightening cycle is over, Canadian rates would still be miles below their previous cyclical peaks. Given today's low interest rates, money invested in five-year GICs would take twice as long to achieve the same inflation-adjusted return than in the mid-1980s." Tal says, "The practical implication of this environment is that young Canadians today must start saving very early in their life compared to previous generations. Our findings … suggest that this is not happening." | 
