House prices have propelled Canadians’ net worth gains for a decade

Now what?

 CIBC has a new report out on Canadians and retirement. It contains many of the usual elements of the well-known horror story: savings rates have dropped since the 1980s for Canadians of all age groups; employers’ pension plans are not what they used to be (think defined-contribution plans for new hires, vs. the old, comfy defined-benefits plans); and returns on investment have been dismal. Moral: six million Canadian are in for a 20 per cent drop in their standard of living after they retire, according to the bank.

There’s another bit of data CIBC economists deem troubling: the increase in Canadians’ net worth over the past decade has come largely on the back of house prices. Between 2001 and 2011 household net worth has been rising by over 30 per cent of disposable income annually, roughly in line with the overall trend seen in the previous decade. But since 2001, most of that yearly gain has come from rising house prices:

Home equity appreciation, in other words, seems to have made up for the declining returns from financial assets (the latter due both to historically low interest rates and weak stock market performance, especially since the financial crisis). That’s a risky swap, according to CIBC, because equities are “more liquid and easier to draw down upon retirement.”

As Stephen Gordon pointed out here on Econowatch, these kinds of numbers look less scary once you put them in perspective:

The run-up in housing prices over the past decade has attracted a lot of attention in this regard and led to worries that Canadian households’ balance sheets might be over-weighted on housing. But it turns out that much of the surge in the 2000s can be seen as a recovery from what was a very dismal market in the 1990s … Housing’s share of household assets did increase sharply during the 2000s, but this ratio still hasn’t recovered pre-1990 levels and remains below what it was in the 1970s.

Still, the flat-lining housing market isn’t a pretty prospect for all those Canadians whose wealth is tied up in real estate — and that’s assuming the Canadian economy doesn’t catch a cold and send house prices diving.

 




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House prices have propelled Canadians’ net worth gains for a decade

  1. I think you meant moral rather than morale.

    • Indeed, thanks for pointing that out

  2. “…but this ratio still hasn’t recovered pre-1990 levels and remains below what it was in the 1970s.”

    Math and real estate isn’t really my thing…but didn’t those 70s home owners also have good pensions to fall back on Mr G? And while inflation/stagflation isn’t remotely the problem it was back then, isn’t the market just a tad more volatile now in terms of equities, savings rates, personal debt and real estate values?

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