Canadians are saving much less than they used to, the result of a long-term shift in incentives that has favoured borrowers over savers and seen households pile on billions of dollars in mortgage debt to build wealth.
The household savings rate – the percentage of disposable income left after spending – most recently clocked in at 1.7 per cent, near its lowest point in six decades, according to Statistics Canada. In dollar terms, the plunge is substantial. Last year, $852 was saved per household, compared with greater than $3,500 in 2013.
Moreover, Canada finds itself in a starkly different situation from the United States and Germany, where consumers have ramped up saving despite interest rates that offer little reason to do so.
In isolation, a low savings rate isn’t cause for alarm, economists say. But it suggests many households aren’t putting money aside for a rainy day, and when the next economic shock hits, they could be forced to rein in spending to get by – or take on even more debt.
“If consumption spending collapses, then you would actually see [gross domestic product] growth slow down significantly, which would raise the possibility of a recession,” said Krishen Rangasamy, senior economist at National Bank of Canada. “So that’s why it’s a concern.”
This era of loose monetary policy has upended household balance sheets. With interest rates so low, these are terrible times for savers, but a boon for borrowers. Thus, Canadians have put their cash to work through home purchases.
Between 1999 and 2016, mortgages accounted for 84 per cent of the total increase in debt held by families, according to a Statscan report released in August. Total mortgage debt now stands at $1.5-trillion. And when times get tough, or cash is needed for a big purchase, Canadians are using their homes as piggy banks. Homeowners extracted $89-billion in equity from their properties in 2017, largely through home-equity lines of credit, according to a recent Bank of Canada staff note.
Ease of credit may have Canadians feeling more comfortable with less of a nest egg, Mr. Rangasamy said.
“It’s not like, say, 50 years ago, where in case of a rainy day, you had two options,” he said. “One, to just rely on your savings, and two, get to the bank and ask for a loan.”
Now, he said, “you don’t even have to go to the bank” to access credit.
On paper, Mike Kriberg doesn’t seem like he would struggle to save. He and his wife – a refrigeration mechanic and registered nurse, respectively – have a combined annual income of roughly $160,000. But subtract the mortgage payments on their home in Victoria, plus the cost of raising three children, and the family finds itself living paycheque to paycheque in a beautiful, if pricey, corner of Canada.
Meantime, other debts have piled up: $27,000 on the credit card, plus $12,500 on a line of credit. Mr. Kriberg, 49, expects to deal with any lingering debts when he retires.
“That’s our goal, to pay things off at that point, which sucks,” he says.
At the expense of savings, Canadians are spending more than ever on debt payments. The household debt-service ratio sits at a record 14.9 per cent – meaning, households are spending about 15 cents of every after-tax dollar on debt payments. For the second consecutive quarter, households spent more on interest than principal repayments. (That follows a brief hiking cycle from the Bank of Canada that brought the benchmark interest rate to 1.75 per cent, from 0.5 per cent.)
“A lot of people are leveraged as maximum as they possibly can be, and they’re just barely breaking even with the minimum payments they’re paying right now,” said Shannon Lee Simmons, a certified financial planner. “And so if they’ve got variable debt that will go up – meaning, their payments will go up – that’s a very scary position to be in.”
The situation in Canada differs wildly from the U.S., where people are hoarding cash to a greater degree. The U.S. personal savings rate is running north of 8 per cent, and the country’s household debt burden is markedly lower than a decade ago.
“I think it still does partially reflect the fallout in the U.S. from the financial crisis,” Douglas Porter, chief economist at Bank of Montreal, said in an interview with The Globe and Mail. “Households in the U.S. were scarred by that experience.”
There’s another factor driving Canada’s savings rate lower: the country is getting older, and people generally spend more than they earn in their retirement years. If Canada’s age distribution was held constant at 1999 levels, today’s savings rate would be about three percentage points higher, BMO said Friday in a report.
All that said, high savings aren’t necessarily a good sign. Consider Germany, which is coping with tepid growth and weakness in its manufacturing sector. Despite negative interest rates, Germany’s savings rate has increased to about 11 per cent, which “in part reflects concern about the economic outlook,” Mr. Porter said.
Another case is Canada, circa 1982. The household savings rate hit a record 21.6 per cent, but the economy was also racked with sky-high inflation and mortgage rates were well into double digits.
“In Canada’s history, some of our highest savings rates have been at terrible times for the economy, because consumers were just so worried that they weren’t willing to spend,” Mr. Porter said. “You try to find just the right balance.”
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Matt Lundy