CIBC on housing and the Canadian consumer
This suggests that something more fundamental (than demographics -ed.) has impacted all Canadians uniformly, and is responsible for the drop in the savings rate. Such factors probably include lower inflation expectations, an extended period of low interest rates, the cohort effect (for example, the changing financial attitudes and behaviours of a 40-year old person today compared to a 40-year-old person 10-20 years ago), and innovation and deregulation in financial markets.
The recent surge in savings in the US suggests that changing macro economic conditions can dramatically impact the savings rate. In fact, at near 6%, the American savings rate is 1.6 percentage points higher than in Canada2—the largest gap on record.
These are indeed some of the frequent topics on this blog: Canada’s low savings rate and the propensity for people to change perception en masse in response to economic conditions. I’ve long maintained that the primary driver of the low savings rate is shifting consumer perceptions towards consumption and materialism, with falling interest rates as a close secondary factor. One need only look at the arguable rise in housing as a form of conspicuous consumption to see this reality.
Note what caused the savings rate in the US to spike, even amid the lowest inflation and interest rate environment in half a century: Falling house prices, collapsing net worth, and a retrenching consumer.
CIBC notes that Canadians have largely ignored savings due to the perceived wealth increase in their homes.
“The reality is that the (Canadian -ed.) real estate boom has rested on low interest
rates that are clearly behind us. And one should not underestimate the importance of the housing market in impacting the Canadian savings rate. After all, with the average house price in Canada more than doubling since 1997, many households have been saving indirectly or passively via the increase in their home equity, and thus felt less pressured to save from their current income.
That housing “wealth effect” stimulated consumption and reduced savings. Not only has real estate wealth risen much faster than wealth linked to financial assets during
the past decade (Chart 2), but also the housing wealth effect is significantly more powerful than the wealth effect associated with rising stock prices.
Here’s the thing: You can’t eat your house. It can’t sustain an expected lifestyle in retirement absent significant associated financial assets. You can, however, use the interest and dividend payments from financial savings to sustain a lifestyle during retirement. Therein lies a huge unanswered question for me: All evidence seems to suggest that the wave of boomers set to retire over the next decade are exceptionally house rich, yet not nearly as financially healthy when financial assets are considered.
This is a topic I explored in an earlier primer on demographics. It remains to be seen just how many people are planning on accessing home equity via downsizing to partially fund their retirement, though all evidence seems to suggest that it is not an insignificant number. The next obvious question is how will this happen without exerting downwards price pressure compressing given that home ownership rates and debt levels are already at all-time highs.
Bank of Canada toots its own horn
Jean Boivin, Deputy Governor of the Bank of Canada, recently gave an interesting speech in Montreal:
Boivin offers his insights into how Canada managed to experience such a strong rebound from the depths of the “Great Recession”. It’s an interesting read, though I certainly don’t agree with all Boivin’s conclusions.
“If the recovery was speedier, despite weaker contributions from investment and exports, support for the recovery must have come from household and government spending. This was indeed the case. Household spending declined by only 2 per cent between 2009 and 2010, compared with 6 per cent during the previous two recessions. The contribution of government spending to growth was more than one percentage point in each year.
The greater strength of household and government spending reflects Canada’s favourable position at the outset of the recession. Major adjustments had been made to the structure of the Canadian economy. Business and household balance sheets were relatively sound, and the banking system was robust, managed prudently, and sufficiently capitalized.”
Certainly it was household and government spending that served as the catalyst to the rapid rebound in economic growth, but I certainly don’t believe that this in any way reflected a “strong” consumer balance sheet. Boivin notes that household balance sheets were “relatively strong”. Compared to what? If compared to our own Canadian history, this is categorically false as we had been making historic highs in debt/income ratios for some time before the onset of the recession.
If compared to the US, sure we may have looked okay then, but we’ve now passed the US consumer in terms of our relative indebtedness. And may I suggest that perhaps it’s unwise to look at the greatest example of wealth destruction in human history currently ongoing in the US and suggest that since we didn’t experience their levels of excess, that somehow that makes us prudent.
Other noteworthy news stories:
1) Rosenberg’s 180 on Canadian housing: Canadian housing is okay– Globe and Mail
I’ve got a lot of respect for David Rosenberg, but I believe he is flat out wrong on this one. Rosenberg argues that there is no looming supply/demand imbalance as home builders have pared back new single unit construction. This is a valid point, although it does not address the overall level of housing starts which continues to significantly outpace net household formation once condos and other multi family dwellings are taken into account. Perhaps the more important question involves the ability and willingness of Canadians to continue to take on mounting debt loads to support house prices. Interest rates have only one direction to rise while credit conditions are tightening and job growth remains tepid.
Rosenberg also argues that increased immigration may help to support house prices:
“Note that in 2009, net international immigration to Canada surged 13 per cent. So not only is the country acting as a magnet for international capital inflow, but Canada is also being increasingly viewed as a stable place to do business and a desirable area to live.”
This is highly suspect. Read yesterday’s post for insight into how immigration affects real estate prices. Rosenberg’s about-face on Canadian housing leaves me scratching my head as the underlying fundamentals which he so often referenced while discussing the Canadian bubble (or “giant sud” as he would say) have only deteriorated in recent months.
2) Consumer confidence slides in March– Globe and Mail
The Conference of Canada released their March consumer confidence numbers which showed widespread declines across all key measures.
“Responses to the current and future finances questions were particularly pessimistic, the board said. Sentiment toward current finances were “worrisome,” the board said, and although it has improved since the recession, the balance has remained negative for 30 straight months.”
“The balance of opinion also worsened on future employment and responses to the question on major purchases trended negatively.”