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.
EDMONTON – Jake Allen made 31 saves for his second shutout of the season and 26th of his career as the New Jersey Devils closed out their Western Canadian road trip with a 3-0 victory over the Edmonton Oilers on Monday.
Jesper Bratt had a goal and an assist and Stefan Noesen and Timo Meier also scored for the Devils (8-5-2) who have won three of their last four on the heels on a four-game losing skid.
The Oilers (6-6-1) had their modest two-game winning streak snapped.
Calvin Pickard made 13 stops between the pipes for Edmonton.
TAKEAWAYS
Devils: In addition to his goal, Bratt picked up his 12th assist of the young season to give him nine points in his last eight games and now 15 points overall. Nico Hischier remains in the team lead, picking up an assist of his own to give him 16 points for the campaign. He has a point in all but four games this season.
Oilers: Forward Leon Draisaitl was held pointless after recording six points in his previous two games and nine points in his previous four. Draisaitl usually has strong showings against the Devils, coming into the contest with an eight-game point streak against New Jersey and 11 goals in 17 games.
KEY MOMENT
New Jersey took a 2-0 lead on the power play with 3:26 remaining in the second period as Hischier made a nice feed into the slot to Bratt, who wired his third of the season past Pickard.
KEY RETURN?
Oilers star forward and captain Connor McDavid took part in the optional morning skate for the Oilers, leading to hopes that he may be back sooner rather than later. McDavid has been expected to be out for two to three weeks with an ankle injury suffered during the first shift of last Monday’s loss in Columbus.
OILERS DEAL FOR D-MAN
The Oilers have acquired defenceman Ronnie Attard from the Philadelphia Flyers in exchange for defenceman Ben Gleason.
The 6-foot-3 Attard has spent the past three season in the Flyers organization seeing action in 29 career games. The 25-year-old right-shot defender and Western Michigan University grad was originally selected by Philadelphia in the third round of the 2019 NHL Entry Draft. Attard will report to the Oilers’ AHL affiliate in Bakersfield.
UP NEXT
Devils: Host the Montreal Canadiens on Thursday.
Oilers: Host the Vegas Golden Knights on Wednesday.
This report by The Canadian Press was first published Nov. 4, 2024.
KANSAS CITY, Mo. (AP) — Patrick Mahomes threw for 291 yards and three touchdowns, and Kareem Hunt pounded into the end zone from two yards out in overtime to give the unbeaten Kansas City Chiefs a 30-24 win over the Tampa Bay Buccaneers on Monday night.
DeAndre Hopkins had two touchdown receptions for the Chiefs (8-0), who drove through the rain for two fourth-quarter scores to take a 24-17 lead with 4:17 left. But then Kansas City watched as Baker Mayfield led the Bucs the other way in the final minute, hitting Ryan Miller in the end zone with 27 seconds to go in regulation time.
Tampa Bay (4-5) elected to kick the extra point and force overtime, rather than go for a two-point conversion and the win. And it cost the Buccaneers when Mayfield called tails and the coin flip was heads. Mahomes and the Chiefs took the ball, he was 5-for-5 passing on their drive in overtime, and Hunt finished his 106-yard rushing day with the deciding TD plunge.
Travis Kelce had 14 catches for 100 yards with girlfriend Taylor Swift watching from a suite, and Hopkins finished with eight catches for 86 yards as the Chiefs ran their winning streak to 14 dating to last season. They became the sixth Super Bowl champion to start 8-0 the following season.
Mayfield finished with 200 yards and two TDs passing for the Bucs, who have lost four of their last five.
It was a memorable first half for two players who had been waiting to play in Arrowhead Stadium.
The Bucs’ Rachaad White grew up about 10 minutes away in a tough part of Kansas City, but his family could never afford a ticket for him to see a game. He wound up on a circuitous path through Division II Nebraska-Kearney and a California junior college to Arizona State, where he eventually became of a third-round pick of Tampa Bay in the 2022 draft.
Two year later, White finally got into Arrowhead — and the end zone. He punctuated his seven-yard scoring run in the second quarter, which gave the Bucs a 7-3 lead, by nearly tossing the football into the second deck.
Then it was Hopkins’ turn in his first home game since arriving in Kansas City from a trade with the Titans.
The three-time All-Pro, who already had caught four passes, reeled in a third-down heave from Mahomes amid triple coverage for a 35-yard gain inside the Tampa Bay five-yard line. Three plays later, Mahomes found him in the back of the end zone, and Hopkins celebrated his first TD with the Chiefs with a dance from “Remember the Titans.”
Tampa Bay tried to seize control with consecutive scoring drives to start the second half. The first ended with a TD pass to Cade Otton, the latest tight end to shred the Chiefs, and Chase McLaughlin’s 47-yard field goal gave the Bucs a 17-10 lead.
The Chiefs answered in the fourth quarter. Mahomes marched them through the rain 70 yards for a tying touchdown pass, which he delivered to Samaje Perine while landing awkwardly and tweaking his left ankle, and then threw a laser to Hopkins on third-and-goal from the Buccaneers’ five-yard line to give Kansas City the lead.
Tampa Bay promptly went three-and-out, but its defence got the ball right back, and this time Mayfield calmly led his team down field. His capped the drive with a touchdown throw to Miller — his first career TD catch — with 27 seconds to go, and Tampa Bay elected to play for overtime.
UP NEXT
Buccaneers: Host the San Francisco 49ers on Sunday.
NASHVILLE, Tenn. (AP) — Darcy Kuemper made 16 saves for his first shutout of the season and 32nd overall, helping the Los Angeles Kings beat the Nashville Predators 3-0 on Monday night.
Adrian Kempe had a goal and an assist and Anze Kopitar and Kevin Fiala also scored. The Kings have won two of their last three.
Juuse Saros made 24 saves for the Predators. They are 1-2-1 in their last four.
Kopitar opened the scoring with 6:36 remaining in the opening period. Saros denied the Kings captain’s first shot, but Kopitar collected the rebound below the goal line and banked it off the netminder’s skate.
Fiala, a former Predator, made it 2-0 35 seconds into the third.
The Kings held Nashville to just three third-period shots on goal, the first coming with 3:55 remaining and Saros pulled for an extra attacker.
Elsewhere in the NHL on Monday:
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DEVILS 3 OILERS 0
EDMONTON, Alta. (AP) — Jake Allen made 31 saves for his second shutout of the season and 26th of his NHL career, helping the New Jersey Devils close their western Canadian road trip with a 3-0 victory over the Edmonton Oilers.
Jesper Bratt had a goal and an assist and Stefan Noesen and Timo Meier also scored. The Devils improved to 8-5-2. They have won three of their last four after a four-game skid.
Calvin Pickard made 13 saves for Edmonton. The Oilers had won two straight.
