Roseman: Canadian consumers are weaker
April 04, 2010
Ellen Roseman
We think we're in good shape. We made it through hard times, thanks to healthy banks and tight mortgage rules, and we feel confident about the future.
All this is self-delusion, some economists say, pointing to the ugly reality lurking beneath the complacent veneer.
Maclean's magazine reported last February that Canada is virtually the only country where households have taken on more debt during this recession.
While total U.S. household debt shrank 1.7 per cent over the past year, debt levels here jumped 7 per cent. Most of the increase has come as a result of the huge mortgages people are taking out to buy homes at today's soaring prices.
On April 1, CIBC economist Benjamin Tal published a report, Canadian consumers – more confident but less capable, that said the surge in household consumption is not backed up by rising consumer fundamentals. Tal has created a consumer capability index that looks at Canadians' ability to spend, not their willingness to spend.
He sees some worrisome signs:
- Disposable income growth has been going down for the past year. In the year ended last February, household debt went up more than three times faster than income growth.
- Canadians have seen their liabilities rising twice as fast as their assets over the past two years – despite the rebound in stock valuations and the recent surge in home prices.
- The gap between real estate gains and income growth is also widening, with the ratio of house prices to income hovering at a 20-year high.
While there are also encouraging signs – a recent increase in the savings rate and a low long-term unemployment rate – "the balance is still weighted toward the downside," he says.
"Canadian consumer fundamentals are weaker than they have been in almost 15 years."
With higher interest rates on the way, household spending can't keep growing. It's not sustainable. And that means our consumer-driven economy may start to flag.
To me, this is a financial wake-up call. It's time to prepare for a less prosperous future.
So, what does the behavioural change involve?
Try to pay off your mortgage more quickly to avoid the shock of coming rate increases.
Don't take on more debt to buy houses at today's elevated prices. The accelerated growth in real estate values could level off soon.
Cut out frivolous spending.
Finally, think long-term. Thanks to medical advances, you may quit working in your 60s and have to stretch your retirement savings until your 80s or 90s.
Toronto sociologist Lyndsay Green looks at the challenges raised by longer life spans in a new book, You Could Live a Long Time: Are You Ready? (Thomas Allen, $19.95). Many seniors she spoke to found it helpful to plan ahead and establish some clear goals.
"Thinking about your financial future could mean a future where you won't need to think about finances," Green says.
In the upcoming Money 911 columns each Sunday, we'll look at how to plan for life beyond full-time work. How much do you need to save? Are you on the right track? What if you haven't started yet?
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