December 2, 2018 | Zero

Do you save? Monthly?

Most don’t. It’s shocking, in fact. The savings rate just hit 0.8%. So the average household spends 99.2% of what comes in. That compares with savings of 1.4% over the last year, which was already the worst in 13 years.

How does this compare with history and others?

It sucks. In 1982 (when interest rates were high) we saved 20% of take-home pay. In 1993 it was 14%. Six years ago it was 5.5%. Now, at 0.8%, it’s basically zero. The worst. Ever. So four in ten households say they’d be pooched if one paycheque were missed.

Canadians also hold an embarrassing place in the world. At the bottom, circling the drain. The savings rate in the States is 6.2%, in Britain it’s 4.5% while in Europe the Germans save almost 11%, the French 14% and Italians 8.6%. The Japanese tuck away 12.5% and it’s only the Australians – house horny like us – who spend most of what they make. Savings there equal 1%.

Down, down, down she goes. Savings almost zero.

So what?

It puts Canada closer to recession since families without savings have lost the ability to withstand shocks (like GM closing, oil plunging or interest rates rising). It throws into question increased consumer spending (which hurts retailers) and along with tighter mortgage regs is bad news for housing. Says TD: “It’s concerning that households aren’t building up buffers and prepping for retirement like they used to. The extent to which Canadians turn around their priorities when it comes to their financial situation could also mean less money for consumer spending.” Says the National Bank: “It doesn’t bode well for consumption spending moving forward.”

Real estate did this. Families owe more than $2 trillion, almost 70% in mortgages. They’ll all renew at higher rates over the next few years, since the Bank of Canada has already increased five times. Because people rolled the dice on a single asset, embraced epic debt, and convinced each other buying something with 20x leverage was okay – ‘because everyone is doing it and the government would never let things go down’ – we’ve got huge systemic risk.

Compared to this threat, a five or ten per cent temporary plop in stock markets is hardly worth discussing. Real estate in urban centres will decline, in some places seriously, and a shocking amount of net worth will be erased. Whether this causes a made-in-Canada recession or not is unknown, but the impact on many households will be palpable. The corollary of that – scant savings and overexposure to housing – is a growing retirement crisis. If you’re not adhering to my Rule of 90, this probably includes you.

Well, here comes Joseph the young doctor, to furnish us with an excellent example.

At least he knows how to suck-up, and be humble: “You really should be required reading in school for financial education,” he writes. “ Having read a number of your posts on the Canadian housing market and financial decisions I felt like I should throw my analysis to you to point out our obvious mistake for others to learn from.”

Here’s the story:

“Working professional couple in healthcare, early/mid 30s both with long education requirements leading to high education costs (and no company pensions), and a two-year old.  Gross income around 180-200k now, will increase to 350-400k in two years.  Highly insured for life/disability.

“No significant savings, about15k in liquid cash appropriated for future expenses and an emergency fund and debt of 60k student loans remaining.

“Due to (choose your favourite – moisting/FOMO/nest instinct/too much rum) we bought a house in Victoria for 750k in 2016 with a family loan for the DP, serviced at our mortgage rate of 2.59% at 30yr amort (we only had savings for the closing costs).  Essentially, we got lucky and within two years it was worth 925k.  Then we had to move for the last part of our training to a snowy prairie city for two years.  No guarantee there’d be a job upon finishing.  We debating selling/renting for a long time.  The mistake, as you can guess, is we opted to rent it.

“Rent is cash neutral covering all costs including mortgage, taxes, utilities, and the income tax costs except for 4k. But we’re over-extended, still in debt, and the housing market has probably dropped 75k already which eliminated our upside of principle gained.  I feel we made a 100k mistake – and extrapolated over 30 years likely cost ourselves almost 1 million in “retirement money”. Thoughts on righting the ship?”

Few on this viper-infested blog will shed tears for a doc and his squeeze on their way to a $400,000 income. But that’s not the point. Rather it’s about the debilitating impact of real estate ownership. They bought when they couldn’t afford it, borrowed the deposit, have saved nothing, owe their family a big debt, are seeing windfall equity being rolled back and could face negative net worth in a year or two as the process gains speed.

The obvious mistake was not cashing in their chips in Victoria, collecting the hundred grand unearned gain and moving on – using that cash to pay down debt and repay relatives. The doc is right. This could make a heap of difference down the road to professionals who lack pensions (and common sense).

Joe should sell, of course. Instead of subsidizing tenants, carrying debt, suffering negative cash flow and – despite a growing income – saving nothing, it’s time to zero the borrowings and start building up liquid assets. There’s no assurance where employment will be, and FOMO is so 2016. Surely on two hundred grand a year they can brim their TFSAs, start building RRSPs plus collect the 20% grant for a fully-funded RESP. Houses are easy to get. Retirement funds are not.

The morals: the goal of life is not a house. Leverage isn’t normal. Never ask your doctor for investment advice. And the stock market’s the least of our worries.

Garth Turner December 2nd, 2018

Posted In: The Greater Fool

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