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A looming price decline could undo at least some of homeowners’ recent net worth gains. (Fred Lum/The Globe and Mail)
A looming price decline could undo at least some of homeowners’ recent net worth gains. (Fred Lum/The Globe and Mail)

ROB CARRICK

Forget about high house prices - debt levels signal middle-class distress Add to ...

Your net worth shot up in February if you’re a homeowner in Calgary, Toronto, Vancouver, Saskatoon and some other cities.

It was a good month for house price increases in February, and that means today’s most misleading measure of wealth has also improved. Gaining net worth is like losing weight. It’s great and all, but it’s a momentary victory, not permanent.

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Net worth is the amount by which the value of the things you own exceeds the amount you owe. Statistics Canada’s latest tally shows that rising home prices and pension plan values pushed median family net worth to $243,800 in 2012, up 44.5 per cent on an inflation-adjusted basis from 2005.

You didn’t use to hear net worth mentioned much as it’s completely detached from the day-to-day life of spending and saving. But lately, net worth has gained some stature. In the debate over how financially healthy Canada’s middle class is, it’s become the gauge of choice for those who think we’re doing fine. This demands a reality check.

Here’s the real story of rising net worth: Runaway house prices have helped to gloss over a big surge in debt. Over all, there are some things to be pleased about in the latest net worth numbers. But we’re kidding ourselves if we think net worth has much to say about the financial well-being of the middle class.

To start with, there’s the housing problem. Real estate – that’s principal residences plus cottages, investment properties and other holdings – accounted for about 44.5 per cent of assets in 2012. That’s a lot of net worth to be based on an asset that has done abnormally well in recent years. National house prices grew by an average 5.6 per cent between 2005 and 2012; the inflation rate, which house prices can be expected to track over the long term, averaged just below 2 per cent over that period.

Home sales are losing momentum, but prices just keep on going in many cities. As reported Monday, the Canadian Real Estate Association’s Home Price Index showed a year-over-year 9.1-per-cent increase in Calgary last month and a 7.3-per-cent rise in Toronto. Vancouver, Saskatoon and Montreal were in the 2.5- to 3.5-per-cent range. Those increases mean more net worth is being added to the shaky foundation of the housing market.

There’s no consensus on what’s ahead for housing, but plenty of people say a looming price decline could undo at least some of the net worth gains in recent years. Housing could fall in price just as baby boomers try to actually make use of the net worth they have tied up in housing.

The housing-related holes in the rising net worth story don’t end there. The same soaring house prices that build net worth also lead to higher debt loads. Houses are so expensive today that people are relying on borrowing to maintain their lifestyles. Rising house prices even promote this. The more your house is worth, the more you can borrow against it using a home equity line of credit. Statistics Canada’s net worth data show that the outstanding balance on lines of credit rose a stunning 87 per cent from 2005 to 2012.

Other major contributors to higher net worth were company pension plans, registered retirement savings plans and registered retirement income funds, which collectively reached a family median of $116,700 in value, up from $77,400 in 2005. Rising stock markets between 2005 and 2012 increased saving by aging baby boomers, as did rising stock markets (even with the 2008-09 market crash).

Fatter pensions and RRSPs are far more beneficial than a rise in house prices because this money will help pay your living costs when you leave the work force. Selling a house mainly gives you money you’ll need to buy your next home.

And yet, like housing price increases, gains in registered savings are in no way money in the bank. After the big runup of the past couple of years, a stock market correction would be natural and, potentially, sharp enough to roll back your net worth.

At best, net worth is useful financial trivia. But in emphasizing the rise in net worth over the past several years, we create an image of financial well-being based precariously on assets that have enjoyed a phenomenally good run in the past few years.

The better way to tell how people are doing financially is to focus on the debt side of the net worth ledger. Today, debt levels are a clear sign of middle-class distress.

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Family assets, debts and net worth

Rising net worth has been cited as an indication that the middle class is doing fine. Here’s how both assets and liabilities tracked between 2005 and 2012.

2005 ($-mil)2012 ($-mil)
Total assets6,395,1349,410,656
Private pension assets1,856,0892,829,705
Financial assets, non pension664,9001,047,214
Deposits in financial institutions269,929343,984
Mutual funds / investment funds / income trusts152,129239,468
Stocks117,222204,864
Bonds (saving and other)39,37524,378
Tax-free savings accountsn/a65,939
Other financial assets86,246168,580
Non-financial assets3,203,2864,744,580
Principal residence2,137,8903,254,275
Other real estate546,886931,762
Vehicles194,726245,520
Other non-financial assets323,785313,023
Equity in business670,859789,158
Total debts864,6251,337,071
Mortgages650,7511,029,811
Principal residence552,849821,010
Other real estate97,901208,801
Line of credit77,492144,946
Credit card and installment debt29,31635,321
Student loans22,71828,272
Vehicle loans52,43975,814
Other debt31,90922,908
Net worth (assets less debts)5,530,5098,073,585

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