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A report by Royal LePage say the pace of rising home prices slowed in Canada in the second quarter due to softness in the Greater Toronto Area market. A for sale sign is shown in front of west-end Toronto homes Sunday, April 9, 2017. THE CANADIAN PRESS/Graeme RoyGraeme Roy/The Canadian Press

A hot housing market feels awesome if you own a home, but there are side effects.

You spend more when your home is rising in value, and you put less money away as savings. You’ll need to fix that when the housing market falls or moves sideways for a while. With interest rates possibly rising again on Wednesday, don’t dismiss this possibility.

A new report from CIBC Economics highlights the two kinds of savings – active and passive. Active savings is putting money away, while passive savings occurs when assets you own rise in value. For the past 20 years, passive savings have ruled in Canada.

Canadian Real Estate Association numbers show the average resale house price gained just over 6 per cent on an average annual basis from 1997 to 2007. A strong housing market dulls your motivation to save actively and it also prompts you to spend money you might otherwise have saved. To a much lesser extent, the same applies to strong returns from stocks.

The CIBC study quotes Bank of Canada numbers showing that consumers spend 5.7 cents of every dollar in the increase net value of their home. This suggests that, over the past decade alone, rising home prices have resulted in total forgone savings of $160-billion and reduced the national savings rate by 1.5 per cent on average.

Economists use the term “wealth effect” to explain spending triggered by rising prices for assets such as houses and stocks. “My joke is that if the value of your house went up 10 or 15 per cent a year, you go to your wife and say, you know what, we’re richer. Let’s go out and have a nice dinner ‘on the house,’ ” CIBC deputy chief economist Benjamin Tal said.

Mr. Tal believes that, with housing markets cooling and price gains harder to come by, it’s time to get back to active savings. The challenge here is to convince people that house prices won’t keep rising enough to lessen the need to actively save.

The Toronto market slumped badly this year, although June results showed modest pickups in sales and prices. Home sales in Vancouver fell sharply in June on a year-over-year basis, and the supply of homes for sale reached a three-year high. There are a few hot housing markets these days – Ottawa and Montreal stand out. But elsewhere prices are, for the most part, up or down just a little.

Mr. Tal said the next one to three years could be tricky for housing, in part because of rising interest rates. The Bank of Canada has a window to increase its trendsetting overnight rate on Wednesday for the fourth time in the past 12 months, and five out of seven economists in one recent survey by saw rates increasing.

Other things weighing on housing this year include the ramping up of mortgage stress tests to ensure borrowers can afford higher rates and the risk of the long current economic expansion lapsing into recession. “We will have a recession two or three years from now because it’s time,” he said.

That national savings rate cited in the CIBC study is an imprecise measure in that it looks just at what’s left over in household after-tax income after all spending. Rising value in your home or your investments is left out, which helps explain why the official savings has been locked in a range between roughly 3 and 5 per cent since 2009 (it’s now 4.4 per cent), while many people have doubled their money or better in housing. Back in the early 1990s, the savings rate exceed 10 per cent.

Hot housing has been the feel-good personal finance story of the 2000s so far. Enjoy your gains, but recognize how your behaviour as a saver has been altered for the worse and then make adjustments for when housing does actually cool off.

If you’re in debt, especially non-mortgage debt with a comparatively high interest rate, get that paid off soonest. Then, redirect at least some of your former debt repayment money into savings and long-term investments.

While it’s going to be a challenge, Mr. Tal sees this shift to active savings as a good thing for your personal finances. “I would rather see active savings because passive savings is a reflection of asset value that can change quickly, while active savings is more permanent.”

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