For the past 15 years, Canadians haven't been saving money, in large part because there was no pressing need. Rising home prices made people feel richer, and saving for a rainy day was a low priority.
But that economic era is fast coming to an end. A new report to be released Monday shows the toll that years of passive savings is taking on the financial picture of Canadians.
Having relied overwhelmingly on their homes to build personal wealth, the report says the average Canadian consumer now socks away considerably less than their U.S. neighbours, and will have to start saving more as housing prices moderate.
The gap in savings rates between Canada and the United States now sits at an all-time high. At 4.2 per cent, Canada's saving rate is 1.6 percentage points below the U.S., at 5.8 per cent, according to the most recent data. On average, that means Canadians are spending nearly 96 per cent of their after-tax income.
"We in Canada, and in the U.S., have jumped into this recession totally naked, unprotected," said Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce.
His report, titled Back to Old-Fashioned Saving, suggests the average U.S. consumer has been jolted into saving more by the recent collapse of the U.S. real estate market. However, in Canada, where there has been no shock in the housing market, Canadian consumers have felt less compelled to change their financial ways, and begin actively saving more.
For several years, until late 2008, Canadians saved more than Americans. However, the savings rate in Canada began to fall sharply in 2009.
Though there are signs emerging throughout the banking sector that Canadians are indeed keeping up with credit card bills and are paying down personal lines of credit, savings rates remain largely flat. Only a small uptick in savings has been seen since the start of the downturn in Canada.
The savings slump also has nothing to do with demographics, the report argues, since similar trends have been spotted in all age groups. However, a shift towards active saving will have to take place as housing prices start to come down, the report argues. "While we do not foresee a major correction, the real estate boom is clearly over and even a flat housing market will strip households of their primary means of passive savings," the report says.
"When you feel richer, you say 'I don't have to save.' But when you look at the situation in which the value of your house doesn't go up, or it actually goes down, then you feel different," Mr. Tal said.
Since the 90s, passive savings amounted to as much as $70-billion for Canadian households, Mr. Tal estimates. However, the good news is that it doesn't take a major shift in the economy – or to put it another way, hacking and slashing of household budgets – to shift savings rates back up again. Mr. Tal believes the pressures now being exerted on Canadian consumers will cause a natural shift towards active savings, which will result in the savings rate climbing to 6 per cent by 2015.
"When you are scared, you save money, and you spend less," Mr. Tal said.
That increase in the savings rate is worth an additional $30-billion of savings a year, and will require trimming about $1,000 of spending annually from the average household. However, while that figure may sound small, Mr. Tal acknowledges many Canadian households will not have that flexibility, which could slow the recovery process.
Debt and the psyche of the consumer has been a topic of concern in Canada since last fall, when Bank of Canada Governor Mark Carney raised concerns about household debt levels, and their impact on the economy. In January, Finance Minister Jim Flaherty introduced new mortgage rules, such as eliminating 35-year mortgage amortizations, to reduce overborrowing by Canadians.
Last week, a professor from MIT's Sloan School of Management suggested Canada could be in for a reckoning, and argued banks needed to play a more active role in discouraging Canadians not to borrow more than they can afford.
Derek Dunfield, a neuroscientist and visiting scholar in behavioural economics and marketing at MIT, issued a paper saying Canadians "may soon be overwhelmed" by their debt loads when interest rates increase.
Mr. Dunfield's paper referred to the "culture of borrowing" in Canada, which presents two possible problems for the economy. If interest rates rise and housing prices drop, more people could begin to default on their mortgage and credit card payments, Mr. Dunfield said.
As well, "an equally worrying – and perhaps more likely scenario – is that interest rates go up a little – and more of people's disposable income goes to repaying their debt, leading to a significant reduction in consumer spending."
Since personal spending on consumer goods and services accounts for 58 per cent of Canadian gross domestic product, such a drop could lead to a made-in-Canada recession, Mr. Dunfield said.