Feeling poorer? Inverse wealth effect may add to Canadians' spending gloom - CBC News | Canada News Media
Connect with us

News

Feeling poorer? Inverse wealth effect may add to Canadians' spending gloom – CBC News

Published

 on


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.

  • Have a question or something to say? CBC News is live in the comments now.

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 1994 when 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 Canada runs 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.”

Not only that, but the authors put a number on it, showing that every one per cent jump in housing wealth led to a half per cent rise in new car purchases.

Psychology of wealth

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 effect depends 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. A 2018 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 as the 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 the GameStop frenzy and the cryptocurrency 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.

Follow Don on Twitter @don_pittis

Adblock test (Why?)



Source link

Continue Reading

News

RCMP end latest N.B. search regarding teenage girl who went missing in 2021

Published

 on

 

BATHURST, N.B. – RCMP in New Brunswick say a weekend ground search for evidence related to the disappearance of a teenage girl in 2021 didn’t reveal any new information.

In an emailed statement, the RCMP said 20 people participated in the search for evidence in the case of Madison Roy-Boudreau of Bathurst.

The release said the search occurred in the Middle River area, just south of the girl’s hometown.

Police have said the 14-year-old’s disappearance is being treated as a homicide investigation.

The RCMP said the search “did not reveal any new information regarding the circumstances of her disappearance.”

There are no plans for another search until police receive a tip or a lead pointing to a new search area.

This report by The Canadian Press was first published Oct. 21, 2024.

The Canadian Press. All rights reserved.

Source link

Continue Reading

News

Man Tasered after trespassing in Victoria school, forcing lockdown

Published

 on

 

VICTORIA – A middle school in Victoria was forced into a lockdown after a man entered the building without permission, and police say they had to use a stun gun to make an arrest.

Victoria police say officers received multiple calls around noon on Monday of an unknown male entering Central Middle School, leading staff to set off emergency procedures that put the building under lockdown.

Police say its emergency response team arrived within minutes and found the suspect, who “appeared to be in a drug-induced state,” in the school’s library.

A statement from police says the suspect resisted arrest, and officers had to use a Taser to subdue the man.

He’s being held by police and has been assessed by emergency medical staff.

Police say the man was not armed and there were no continuing safety concerns for students and staff following the arrest.

This report by The Canadian Press was first published Oct. 21, 2024.

The Canadian Press. All rights reserved.

Source link

Continue Reading

News

B.C. Greens’ ex- leader Weaver thinks minority deal with NDP less likely than in 2017

Published

 on

 

VANCOUVER – Former B.C. Green leader Andrew Weaver knows what it’s like to form a minority government with the NDP, but says such a deal to create the province’s next administration is less likely this time than seven years ago.

Weaver struck a power-sharing agreement that resulted in John Horgan’s NDP minority government in 2017, but said in an interview Monday there is now more animosity between the two parties.

Neither the NDP nor the B.C. Conservatives secured a majority in Saturday’s election, raising the prospect of a minority NDP government if Leader David Eby can get the support of two Green legislators.

Manual recounts in two ridings could also play an important role in the outcome, which will not be known for about a week.

Weaver, who is no longer a member of the Greens, endorsed a Conservative candidate in his home riding.

He said Eby would be in a better position to negotiate if Furstenau, who lost her seat, stepped aside as party leader.

“I think Mr. Eby would be able to have fresh discussions with fresh new faces around the table, (after) four years of political sniping … between Sonia and the NDP in the B.C. legislature,” he said.

He said Furstenau’s loss put the two elected Greens in an awkward position because parties “need the leader in the legislature.”

Furstenau could resign as leader or one of the elected Greens could step down and let her run in a byelection in their riding, he said.

“They need to resolve that issue sooner rather than later,” he said.

The Green victories went to Rob Botterell in Saanich North and the Islands and Jeremy Valeriote in West Vancouver-Sea to Sky.

Neither Botterell nor Valeriote have held seats in the legislature before, Weaver noted.

“It’s not like in 2017 when, you know, I had been in the (legislature) for four years already,” Weaver said, adding that “the learning curve is steep.”

Sanjay Jeram, chair of undergraduate studies in political science at Simon Fraser University, said he doesn’t think it’ll be an “easygoing relationship between (the NDP and Greens) this time around.”

“I don’t know if Eby and Furstenau have the same relationship — or the potential to have the same relationship — as Horgan and Weaver did,” he said. “I think their demands will be a little more strict and it’ll be a little more of a cold alliance than it was in 2017 if they do form an alliance.”

Horgan and Weaver shook hands on a confidence-and-supply agreement before attending a rugby match, where they were spotted sitting together before the deal became public knowledge.

Eby said in his election-night speech that he had already reached out to Furstenau and suggested common “progressive values” between their parties.

Furstenau said in her concession speech that her party was poised to play a “pivotal role” in the legislature.

Botterell said in an election-night interview that he was “totally supportive of Sonia” and he would “do everything I can to support her and the path forward that she chooses to take because that’s her decision.”

The Green Party of Canada issued a news release Monday, congratulating the candidates on their victories, noting Valeriote’s win is the first time that a Green MLA has been elected outside of Vancouver Island.

“Now, like all British Columbians we await the final seat count to know which party will have the best chance to form government. Let’s hope that the Green caucus has a pivotal role,” the release said, echoing Furstenau’s turn of phrase.

The final results of the election won’t be known until at least next week.

Elections BC says manual recounts will be held on Oct. 26 to 28 in two ridings where NDP candidates led B.C. Conservatives by fewer than 100 votes after the initial count ended on Sunday.

The outcomes in Surrey City Centre and Juan de Fuca-Malahat could determine who forms government.

The election’s initial results have the NDP elected or leading in 46 ridings, and the B.C. Conservatives in 45, both short of the 47 majority mark in B.C.’s 93-seat legislature.

If the Conservatives win both of the recount ridings and win all other ridings where they lead, Rustad will win with a one-seat majority.

If the NDP holds onto at least one of the ridings where there are recounts, wins the other races it leads, and strikes a deal with the Greens, they would have enough numbers to form a minority government.

But another election could also be on the cards, since the winner will have to nominate a Speaker, reducing the government’s numbers in the legislature by one vote.

Elections BC says it will also be counting about 49,000 absentee and mail-in ballots from Oct. 26 to 28.

The NDP went into the election with 55 ridings, representing a comfortable majority in what was then an 87-seat legislature.

Jeram, with Simon Fraser University, said though the counts aren’t finalized, the Conservatives were the big winners in the election.

“They weren’t really a not much of a formal party until not that long ago, and to go from two per cent of the vote to winning 45 or more seats in the B.C. provincial election is just incredible,” he said in an interview Monday.

Jeram said people had expected Eby to call an election after he took over from John Horgan in 2022, and if he had, he doesn’t think there would have been the same result.

He said the B.C. Conservative’s popularity grew as a result of the decision of the BC Liberals to rebrand as BC United and later drop out.

“Had Eby called an election before that really shook out, and maybe especially before (Pierre) Poilievre, kind of really had the wind in his sails and started to grow, I think he could have won the majority for sure.”

He said he wasn’t surprised by the results of the election, saying polls were fairly accurate.

“Ultimately, it really was a result that we saw coming for a while, since the moment that BC United withdrew and put their support behind the conservatives, I think this was the outcome that was expected.”

— With files from Darryl Greer

This report by The Canadian Press was first published Oct. 21, 2024.

Source link

Continue Reading

Trending

Exit mobile version