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Rising real estate values have made Canadians "house rich," but their
spending habits may keep too many of them "cash poor." Canadian
households currently carry about C$1.10 in debt for every dollar of
disposable income, even though residential real estate continued to be
the major contributor to growth in national wealth, according to
Statistics Canada.
This federal agency uses very specific terminology in outlining the country's economic status:
- National wealth is measured by "economy-wide non-financial assets."
- National net worth is "the sum of non-financial
assets (produced assets, land surrounding structures and agricultural
land) in all sectors of the economy." It represents the sum of the net
worth of persons, corporations and governments and can be expressed as
national wealth less net foreign liabilities.
- National saving is the total savings of
persons, corporations and governments. National saving and investment
contribute to change in national net worth. The revaluation of assets
and liabilities, through changes in share prices, interest rates,
exchange rates and loan allowances, is also responsible for changes in
national net worth.
- National balance sheet accounts are statements
of the balance sheets of all sectors of the economy. These statements
present the non-financial assets owned across the range of sectors and
the outstanding financial claims.
A strong economic end to 2006
belied the fact that growth in national wealth slowed to 1.7 per cent,
a pattern attributed to "the easing of economic activity, partly offset
by sustained price increases for selected non-financial assets."
Strong gains in
the value of Canadian and foreign equities, supported by continued
growth in residential real estate values, drove household net worth up
sharply -- almost 4 per cent -- in the final quarter. The value of
housing continued to grow, accounting for the bulk of the increase in
non-financial assets. New housing prices advanced 1.4 per cent in the
fourth quarter of 2006.
On the down side,
household mortgage and consumer credit debt also continued to increase,
so that household debt outpaced personal disposable income. Don't be
mislead by reported decreases or stabilization in the ratio of
household debt to net worth. Debt is not declining and, until property
is sold, real estate values are statistical "paper" evaluations. Only
when there is a sale will that increase in wealth be realized and
credited against debt. If the sale occurs after a drop in property
value, debt may prevail.
Three-quarters of all respondents to the Canada Mortgage and Housing Corporation 2006 Mortgage Consumer Survey
"indicated that their goal is to pay off their mortgage as quickly as
possible." Reportedly, half stated that "they would use extra money to
pay down their mortgage." Making the mortgage top priority may be the
intention of many property owners, but the ease of credit card use can
distract homeowners from this goal, especially when rising property
values create the illusion of greater personal wealth.
The impact of
strong real estate markets, fueled by historically-low interest rates,
generates wealth in other areas of the economy, too. According to a
2006 Statistics Canada release, total revenues reported by real estate
agents, brokers, appraisers and other real estate industries increased
sharply in 2004, jumping 11.4 per cent to C$8.9 billion that year:
- This growth reflects
an increase in sales and higher real estate prices. For example,
Statistics Canada's national New Housing Price Index jumped almost 6
per cent during 2004, nearly four times the rate of inflation.
- Ontario continued to account for the bulk of the
industry with 52.0 per cent of total revenue, followed by British
Columbia with 19.0 per cent and Quebec with 13.4 per cent.
- These industries were dominated by the offices of real
estate agents and brokers, which generated 88 per cent of the total
revenue.
The recently-released 2006 annual balance sheet accounts stated that national net worth
reached C$4.9 trillion by the end of the year, or C$150,500 per capita.
National net worth had expanded by C$131 billion in the fourth quarter,
up 2.7 per cent and just off the pace of growth set in the third, in
reaction to a significant decline in net foreign indebtedness. On a
year-over-year basis, national net worth jumped almost 4 per cent over
growth in 2005. A slackening in the economy was offset "by sustained
price increases for selected non-financial assets." Statistics Canada
attributes this gain to sustained strong investment, sharp rises in
foreign equity prices and a depreciating Canadian dollar.
National wealth
grew almost 7 per cent in 2006 with residential real estate assets
continuing to make the greatest contribution to the increased value of
non-financial assets, accounting for over 70 per cent of the change.
How much of your wealth is "on paper" -- unrealized capital gain -- vulnerable to economic fluctuations?
Written by PJ Wade
Wondering What Your Home Is Worth? -- Let me show you.
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