Statistics Canada recently released some data measuring changes to household incomes, expenditures, savings rates, assets and liabilities during the pandemic.
I decided to create a few graphs to illustrate their findings.
Before we get to the graphs, here are some of Stats Canada’s key findings:
Disposable income declined for most households in the fourth quarter of 2020, with the largest losses for the lowest-income earners (-10.2%).
Despite declines in disposable income in the fourth quarter, all households recorded higher income in 2020 compared with 2019.
In 2020, the lowest-income earners saw their net worth grow more than that of other households. These gains were driven by larger increases in real estate assets that outpaced increases in mortgage debt.
Lower-income households reduced their non-mortgage debt by more than other households, also contributing to their higher gains in net worth in 2020.
Household incomes rose for all income brackets during the pandemic:
As you might expect, spending declined:
This allowed many Canadians to save more. Note, however, those in lower income quintiles still have negative savings rates:
Higher incomes, less spending and greater savings helped propel net worth. Of course, Canadians’ net worth also got a big boost from rising real estate and financial asset values:
Finally, Canadians are exiting this pandemic in a better financial position than when they entered:
Governments exist to provide public goods (like streetlights) and to socialize certain individual costs (like healthcare) for the overall benefit of its population. It can be argued, therefore, that in addition to free healthcare it might be in a society’s best interest to ensure a secure retirement for every citizen.
Many governments already do this to some extent. In Canada, for example, people who contributed to the Canada Pension Plan will benefit from a schedule of payments upon retirement. Those who haven’t contributed may receive alternative retirement funding, such as the Old Age Supplement and the Guaranteed Income Supplement.
None of these provide for a particularly flush retirement, however it keeps most of Canada’s retired residents housed and fed.
What if, instead of providing supplemental income at retirement, the government gave a lump sum to each person born in Canada? The lump sum would be untouchable until retirement, and would be invested on the baby’s behalf until he reaches age 65.
Assuming a nominal return of 7% and inflation rate of 2%, a $45,000 investment at birth would equate to $3.7 million in nominal terms and just over $1 million in real terms (after inflation) by age 65. All things equal, this should provide a comfortable retirement for every person born in Canada, eliminating the need for OAS and GIS. Moreover, employees would no longer need to contribute to CPP or individual retirement portfolios, freeing up more money for consumption, if desired. But for the sake of simplicity, let’s assume people continue to contribute to CPP.
Providing $45,000 to every resident at birth would likely lead to a number of unintended consequences – such as birth tourism – but let’s leave that to the side and examine whether the broad idea is even feasible. This is a high-level conceptual look, not a thorough scientific analysis, and is meant to spark ideas and generate discussion, not propose ultimate solutions.
According to Statistica, it is expected that about 375,000 babies will be born in Canada in 2020. Therefore, to provide $45,000 for every baby born would cost about $16.875 billion annually. A ton of money. Yes, but not in relative terms.
How could $16.875 billion in new spending ever not be a ton of money? According to Employment and Social Development Canada (ESDC) – a department within the Canadian federal government – planned spending on OAS and GIS in 2017-2018 was $51.155 billion. Far more than the cost of the lump sum at birth, with much worse end results. Using the 4% rule of thumb for sustainable withdrawals, a $1 million portfolio could sustainably generate $40,000 in annual income (in today’s dollars). In contrast, OAS and GIS currently provide maximum $7,368 and $10,992 in annual income.
That’s 54% less retirement income at 3 times the annual cost to the Canadian government. While this analysis doesn’t consider all the nuances and knock-on effects, the idea seems worthy of further discussion.
Employment has collapsed, as much of Canada slowly emerges from Covid-19 quarantines. In fact, the number of employed persons in Canada is near a 15 year low (see chart below).
This probably underestimates the problem because it doesn’t include people who are still technically employed but not receiving a paycheque. Many of these people will undoubtedly be added to the unemployment rosters soon.
It’s no secret that Canadian households are up to their eyeballs in debt. Debt requires money to service, making Canadians highly vulnerable to a negative change to their incomes. The current change is probably the worst we’ve ever seen, putting all forms of household debt at risk of default.
Hundreds of thousands of Canadians suddenly can’t pay their debts and have deferred their mortgages as a result – especially in Quebec, Alberta and Ontario (see chart below). But as I explained in a previous article a mortgage deferral is not a free lunch. The deferred payments are simply adding to what the borrower already owes. (In case you weren’t paying attention, that includes interest on deferred interest.)
All mortgage deferrals do is delay the inevitable. The ability for Canadians to start paying their mortgages again in the future is dependent on employment picking up very quickly. Unfortunately, this doesn’t seem likely. It could take several years for joblessness to shrink back to pre-Covid-19 levels.
The massive volume of mortgage deferrals is a stark warning sign: The Canadian housing market is on the verge of collapse, and with it the Canadian economy.
Simply put, when people can’t pay their mortgages, either they sell and become renters or the bank forecloses and sells the property for them. Either way, a lot more distressed sales enter the market, putting downward pressure on prices. Couple this with a dearth of buyers – due to general economic weakness – and housing inventories rise, again pushing prices down.
It’s only been 3 months and housing prices in Canada area already down 10% across the board. Some parts of Toronto are already down 18%.
While these numbers might not sound huge, they are. A 10-18% change within 3 months is massive! Unless the unemployment situation resolves quickly, by the end of 2020 prices could be down 20-30% across the board.
This isn’t just a housing market issue. The entire Canadian economy is overly dependent on housing and housing-related activity to drive GDP growth. A housing slump will be felt across the entire Canadian economy, with the drag lasting for years.
Ironically, if the housing market declines significantly it will open the door to home ownership to Millennials and Gen Z, which until now were locked out of the market.