It is inevitable that if incomes fail to keep pace with a 6.8 per cent inflation rate, more Canadian wage earners will be forced to scrimp.
But economists who study financial behaviour have found that even those who can afford to keep spending are also looking for ways to cut back.
Anyone who got a pay hike of less than 1.8 per cent this year actually took a more than five per cent cut in their“real” or after-inflation income. It means that those without savings, who spend what they earn, have no choice but to buy less — or go into debt.
And retailers have begun to notice. Earlier this month, shares in U.S. chains Target and Walmart, and Canadian Tire in Canada, declined sharply as falling sales showed up in the bottom line, leading markets lower.
Urge to economize
But there are increasing signs it is not just those without savings who are looking for ways to spend less. Research on something called “the wealth effect” has shown that the many Canadians who have savings invested in real estate, stocks or cryptocurrency are not exempt from the urge to economize.
“What we expect is that as wealth goes up, consumption would increase and as wealth declines, we would expect a decrease,” said Mark Kamstra, an economist who studies behavioural finance at York University’s Schulich School of Business in Toronto.
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Though originally based on economic ideas of how people should behave, the wealth effect actually happens in the real world, repeated studies have found.
While at first some economists insisted the effect only applied to liquid investments, like stocks or bonds where returns could be extracted and spent, there is a growing body of research showing the notional value of your home — even if you have no plans to sell it and extract the value — can change your willingness to spend.
When house prices are soaring at 20% a year, it’s hard for homeowners not to feel rich even if they have no plans to sell. (David Donnelly/CBC)
Those who have studied the wealth effect, including Bank of Canada governor Tiff Macklem in 1994when he was but a humble researcher for the central bank, have concluded the phenomenon is real. Nonetheless, there is still debate, and even contradictory studies, over exactly how it works. As Kamstra explained, while theory proposes a simple model with a few variables, the real world is inevitably complicated and messy.
“There are well-known reasons to fear that constant or declining share prices may exacerbate a slowdown in the economy by depressing the consumption spending of households,” said the report for the U.S. National Bureau of Economic research.
House rich
The report’s conclusions, however, were that “the housing market appears to be more important than the stock market in influencing consumption in developed countries.”
Macklem, who was studying overall national wealth rather than looking at individuals, suggested the reason why things like stocks and bonds had a lesser effect was that a smaller proportion of people owned them. By comparison home ownership in Canadaruns at about 70 per cent.
Certainly the classic anecdotal example for the wealth effect is housing and car sales, where, as the price of relatively modest houses begins to rise in a neighbourhood, new and sometimes expensive cars begin to appear in driveways.
WATCH | Home sales are slowing, as are prices:
Canada’s housing market sees signs of cooling as interest rates rise
1 month ago
Duration 2:03
Experts say higher interest rates are causing a slowdown in Canada’s hot housing market, leading to fewer sales and a slight drop in the average selling price in March.
The anecdote has research to back it up from the Reserve Bank of Australia (RBA), the Down Under equivalent of the Bank of Canada.
In 2015, when Aussie house prices were rising at about 10 per cent a year, the RBA study showed that, “there is a robust cross-sectional relationship between changes in housing wealth and new vehicle registrations.”
The reason why the housing example is especially interesting is because for the most part, those homeowners who bought the cars were not planning to sell their houses to realize the increase in value. That indicates a psychological effect.
“I mean, really, are you wealthier if you are a 50-year-old and your house has doubled in value?” Kamstra asked rhetorically. “What are you going to do? You still have kids in high school. You’re not going to move from the neighbourhood. You can’t downsize. How is that wealth in any sense?”
He points to another study from Britain, that, quite reasonably, shows the strength of the wealth effectdepends on individual circumstances. For example, older homeowners who are considering downsizing respond more to the notional value of their homes when making spending choices.
Do you feel rich enough to buy a Lamborghini? It’s not a myth, an Australian central bank study showed people whose house prices rose bought more new cars. (CBC)
Similarly, those who own securities such as stocks, or have taken a cryptocurrency stake, are the ones who most feel the effects as those investments rise and fall. A2018 study from the University of Ottawa has shown that “both financial and housing wealth have significant effects on Canadian consumption,” and that homeowners only tend to use their house asthe proverbial piggy bank when house prices are rising and interest rates are low.
That window may be closing.
As many commentators on home equity lines of credit, or HELOCS, have observed, Canadians may have gone overboard in borrowing up to 65 per cent of their homes’ value to spend on things like renovations. As interest rates rise and home prices fall, that kind of borrowing and spending is likely to decline.
Buying frenzy
And while people with blue chip portfolios may be willing to sit out a market downturn, the Investment Funds Institute of Canada reports that mutual fund holders sold off billions of dollars worth of their investments in March, a trend that may expand if stocks fall further, locking in declines. New market traders who got in during theGameStop frenzy and thecryptocurrency boom likely felt rich when prices were rising, but are also likely feeling poorer now, said Kamstra.
As the conflicting studies have shown, even with access to historic data, teasing out the impact of the inverse wealth effect is not easy. Measuring it in real time is even harder, but according to pollster Nik Nanos there are signs we may already be seeing its effect.
“Canadian consumer confidence continues to decline with negative pressure on all dimensions tracked, including job security, real estate values, personal finances and forward-look on the economy,” said Nanos in a release of confidence data this week.
And whether you spend less because you actually are poorer or just feel that way, pinching pennies when your future wealth seems uncertain may be a natural impulse that’s hard to resist.
PARIS (AP) — French judicial authorities are investigating the disappearance of two Paralympic athletes from Congo who recently competed in the Paris Games, the prosecutor’s office in the Paris suburb of Bobigny confirmed on Thursday.
Prosecutors opened the investigation on Sept. 7, after members of the athletes’ delegation warned authorities of their disappearance two days before.
Le Parisien newspaper reported that shot putter Mireille Nganga and Emmanuel Grace Mouambako, a visually impaired sprinter who was accompanied by a guide, went missing on Sept. 5, along with a third person.
The athletes’ suitcases were also gone but their passports remained with the Congolese delegation, according to an official with knowledge of the investigation, who asked to remain anonymous as they were not allowed to speak publicly about the case.
The Paralympic Committee of the Democratic Republic of Congo did not respond to requests for information from The Associated Press.
Nganga — who recorded no mark in the seated javelin and shot put competitions — and Mouambako were Congo’s flag bearers at the opening ceremony of the Paralympic Games, organizers said.
CHARLESTON, W.Va. (AP) — A linebacker at Division II West Virginia State was fatally shot during what the university said Thursday is being investigated by police as a home invasion.
The body of Jyilek Zyiare Harrington, 21, of Charlotte, North Carolina, was found inside an apartment Wednesday night in Charleston, police Lt. Tony Hazelett said in a statement.
Hazelett said several gunshots were fired during a disturbance in a hallway and inside the apartment. The statement said Harrington had multiple gunshot wounds and was pronounced dead at the scene. Police said they had no information on a possible suspect.
West Virginia State said counselors were available to students and faculty on campus.
“Our thoughts and prayers are with Jyilek’s family as they mourn the loss of this incredible young man,” West Virginia State President Ericke S. Cage said in a letter to students and faculty.
Harrington, a senior, had eight total tackles, including a sack, in a 27-24 win at Barton College last week.
“Jyilek truly embodied what it means to be a student-athlete and was a leader not only on campus but in the community,” West Virginia State Vice President of Intercollegiate Athletics Nate Burton said. “Jyilek was a young man that, during Christmas, would create a GoFundMe to help less fortunate families.”
Burton said donations to a fund established by the athletic department in Harrington’s memory will be distributed to an organization in Charlotte to continue his charity work.
West Virginia State’s home opener against Carson-Newman, originally scheduled for Thursday night, has been rescheduled to Friday, and a private vigil involving both teams was set for Thursday night. Harrington previously attended Carson-Newman, where he made seven tackles in six games last season. He began his college career at Division II Erskine College.
“Carson-Newman joins West Virginia State in mourning the untimely passing of former student-athlete Jyilek Harrington,” Carson-Newman Vice President of Athletics Matt Pope said in a statement. “The Harrington family and the Yellow Jackets’ campus community is in our prayers. News like this is sad to hear anytime, but today it feels worse with two teams who knew him coming together to play.”
DETROIT (AP) — Joe Schmidt, the Hall of Fame linebacker who helped the Detroit Lions win NFL championships in 1953 and 1957 and later coached the team, has died. He was 92.
The Lions said family informed the team Schmidt died Wednesday. A cause of death was not provided.
One of pro football’s first great middle linebackers, Schmidt played his entire NFL career with the Lions from 1953-65. An eight-time All-Pro, he was enshrined into the Pro Football Hall of Fame in 1973 and the college football version in 2000.
“Joe likes to say that at one point in his career, he was 6-3, but he had tackled so many fullbacks that it drove his neck into his shoulders and now he is 6-foot,” said the late Lions owner William Clay Ford, Schmidt’s presenter at his Hall of Fame induction in 1973. “At any rate, he was listed at 6-feet and as I say was marginal for that position. There are, however, qualities that certainly scouts or anybody who is drafting a ballplayer cannot measure.”
Born in Pittsburgh, Schmidt played college football in his hometown at Pitt, beginning his stint there as a fullback and guard before coach Len Casanova switched him to linebacker.
“Pitt provided me with the opportunity to do what I’ve wanted to do, and further myself through my athletic abilities,” Schmidt said. “Everything I have stemmed from that opportunity.”
Schmidt dealt with injuries throughout his college career and was drafted by the Lions in the seventh round in 1953. As defenses evolved in that era, Schmidt’s speed, savvy and tackling ability made him a valuable part of some of the franchise’s greatest teams.
Schmidt was elected to the Pro Bowl 10 straight years from 1955-64, and after his arrival, the Lions won the last two of their three NFL titles in the 1950s.
In a 1957 playoff game at San Francisco, the Lions trailed 27-7 in the third quarter before rallying to win 31-27. That was the NFL’s largest comeback in postseason history until Buffalo rallied from a 32-point deficit to beat Houston in 1993.
“We just decided to go after them, blitz them almost every down,” Schmidt recalled. “We had nothing to lose. When you’re up against it, you let both barrels fly.”
Schmidt became an assistant coach after wrapping up his career as a player. He was Detroit’s head coach from 1967-72, going 43-35-7.
Schmidt was part of the NFL’s All-Time Team revealed in 2019 to celebrate the league’s centennial season. Of course, he’d gone into the Hall of Fame 46 years earlier.
Not bad for an undersized seventh-round draft pick.
“It was a dream of mine to play football,” Schmidt told the Detroit Free Press in 2017. “I had so many people tell me that I was too small. That I couldn’t play. I had so many negative people say negative things about me … that it makes you feel good inside. I said, ‘OK, I’ll prove it to you.’”
