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.
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.
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.
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.
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.”
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:
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.
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.
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.
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.
KAMLOOPS, B.C. – A 35-year-old man has been charged with second-degree murder after his mother’s body was found near her Kamloops, B.C., home a year ago.
Mounties say 57-year-old Jo-Anne Donovan was found dead about a week after she had been reported missing.
RCMP says its serious crime unit launched an investigation after the body was found.
Police say they arrested Brandon Donovan on Friday after the BC Prosecution Service approved the charge.
The Canadian Press. All rights reserved.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
TALLAHASSEE, Fla. (AP) — Florida State has asked a judge to decide key parts of its lawsuit against the Atlantic Coast Conference without a trial, hoping for a quicker resolution and path to a possible exit from the league.
Florida State requested a partial summary judgment from Circuit Judge John Cooper in a 574-page document filed earlier this week in Leon County, the Tallahassee-based school’s home court.
Florida State sued the ACC in December, challenging the validity of a contract that binds member schools to the conference and each other through media rights and claiming the league’s exit fees and penalties for withdrawal are exorbitant and unfair.
In its original compliant, Florida State said it would cost the school more than half a billion dollars to break the grant of rights and leave the ACC.
“The recently-produced 2016 ESPN agreements expose that the ACC has no rights to FSU home games played after it leaves the conference,” Florida State said in the filing.
Florida State is asking a judge to rule on the exit fees and for a summary judgment on its breach of contract claim, which says the conference broke its bylaws when it sued the school without first getting a majority vote from the entire league membership.
The case is one of four active right now involving the ACC and one of its members.
The ACC has sued Florida State in North Carolina, claiming the school is breaching a contract that it has signed twice in the last decade simply by challenging it.
The judge in Florida has already denied the ACC’s motion to dismiss or pause that case because the conference filed first in North Carolina. The conference appealed the Florida decision in a hearing earlier this week.
Clemson is also suing the ACC in South Carolina, trying to find an affordable potential exit, and the conference has countersued that school in North Carolina, too.
Florida State and the ACC completed court-mandated mediation last month without resolution.
The dispute is tied to the ACC’s long-term deal with ESPN, which runs through 2036, and leaves those schools lagging well behind competitors in the Southeastern Conference and Big Ten when it comes to conference-payout revenue.
Florida State has said the athletic department is in danger of falling behind by as much as $40 million annually by being in the ACC.
“Postponing the resolution of this question only compounds the expense and travesty,” the school said in the latest filing.
The ACC has implemented a bonus system called a success initiative that will reward schools for accomplishments on the field and court, but Florida State and Clemson are looking for more as two of the conference’s highest-profile brands and most successful football programs.
The ACC evenly distributes revenue from its broadcast deal, though new members California, Stanford and SMU receive a reduced and no distribution. That money is used to fund the pool for the success initiative.
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