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Boost in Canadian net worth closely tied to real estate surge

Do you seem richer today? You should, according to a new study by Statistics Canada that shows Canadians rapidly closing the wealth gap with Americans.

Look more closely, though, and the numbers demonstrate why many of us may not feel all that affluent despite our apparent leap ahead on the international wealth scale.

First, the good news: The study shows that, as of 2012, Canadian net worth per capita had surged to 77 per cent of the U.S. level after decades of hovering around 60 per cent of the American benchmark.

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Even better, these numbers aren't merely the result of currency fluctuations, but reflect the actual purchasing power of a given amount of wealth in both countries.

This is where things start getting troublesome, though. As StatsCan points out, much of the shift in relative net worth is the result of changing real estate values in the two countries.

That won't come as a surprise, but the magnitude of the change might. StatsCan calculates that the collapse of the U.S. housing market and subsequent recession wiped away more than 17 per cent of a typical American's net worth in the single year between 2007 and 2008, dragging it down to the equivalent of $224,000 from $271,500.

In contrast, Canadians saw their balance sheets barely tremble during the same period, slipping only slightly to $164,900 from $177,500.

Some will take that as evidence of the inherent soundness of the Canadian real estate market. A more cautious take, though, would be to say that it demonstrates the overwhelming importance of home values to any calculation of personal wealth.

For most of us, a home is our biggest asset, by far. As the U.S. example demonstrates, any ripple in home values can have a tsunami-like effect on our net worth.

To a large degree, the apparent climb in Canadian net worth versus the U.S. is a mirage created by real estate prices. Other measures of relative affluence between the two countries aren't nearly so encouraging.

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For instance, personal disposable income per capita in Canada was less than 70 per cent of the level in the U.S. in 2012, according to StatsCan. (Again, all figures are adjusted for purchasing power differences in the two economies).

While Canadians' disposable income vis-a-vis Americans is higher now than it was a decade ago, it is considerably below its high-water mark back in the late 1970s and early 1980s, when a typical Canadian brought home about 80 per cent of the average American's pay.

The surge in Canadian home prices, combined with relatively mild growth in incomes, has resulted in an increasing ratio of household wealth to disposable income. During the 1970s and 1980s, Canadian households had a net worth equal to about four times their disposable income. By 2012, our typical net worth had soared to 6.7 times our income.

A high ratio of household wealth to disposable income isn't necessarily a good thing. Among other implications, it suggests that assets are pricey in relation to incomes. Or to put things yet another way, it means that young Canadians will have to devote a much larger portion of their incomes to buying certain assets – homes, anyone? – than their parents did, assuming current trends continue.

So by all means, take pride in Canadians' gains against our neighbours. Just remember that it doesn't affect everyone the same way – and that ultimately it all rests on the uncertain future of Canada's remarkably buoyant real estate market.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More


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