|Canada a land of Millionaires?|
May 15, 2011 Garry Marr Financial Post
We are a cocky lot in Canada about our wealth with millionaires apparently abounding everywhere.
Our confidence probably got another boost with a report from the Deloitte Center for Financial Services saying there were 1,745,000 households in Canada with more than $1-million in assets in 2011.
Not bad, but should some of these people really think of themselves as millionaires when an inordinate amount of their wealth is concentrated in an asset they have little intention of selling?
Even among the top 1% of millionaire Canadian households, the Deloitte study found 21% of their wealth was tied up in their home. The percentage isn't broken out but you have to wonder how much wealth the bottom 1% of Canadian millionaire households have tied up in their homes.
If you listen to the naysayers in the Canadian housing industry, this wealth is fleeting -though they've been saying this for about two years and have missed a lot of price appreciation sitting on the sidelines.
Still, you have to wonder how Canadians would be feeling about their wealth today if we had suffered the same fate as the Americans.
A new report seems to indicate the worst may not be over for the U.S. housing industry, with real estate website Zillow.com saying 28.4% of households have negative equity -mortgages worth less than the value of a home.
Prices in the U.S. peaked in June 2006 and on average are now down 29.5% from that high.
Say the same thing had happened in Canada. How would that make you feel about your wealth? The Canadian Real Estate Association says it expects house prices to climb another 4% this year to an average of $352,500.
But let's lay out a different scenario. You bought your home in 2006 when the average price of a home in Canada was $277,211. Now it's worth 29.5% less or $81,777. Add that figure together with the lost appreciation since 2006 and your average Canadian homeowner's net worth drops $157,066.
I have a feeling a few millionaires would drop off the Deloitte list.
"You are only a millionaire when you capture your equity and put your house up for sale," says Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals (CAAMP). "Your home is the biggest part of your financial plan and a lot of people feel they have a lot of equity in their home."
The latest statistics from CAAMP show Canadians have not been shy about drawing on their home wealth -with $26-billion in equity takeouts in the last year or about $30,000 per household.
Not all of it is reckless spending with 36% of households using their equity for renovations and repair.
But the survey also found another 19% are using their equity for debt consolidation and repayment, meaning they could be cov-ering up spending elsewhere.
David Rosenberg, chief economist with Gluskin Sheff & Associates, says when he thinks of true millionaires, he tends just to consider their liquid assets.
"Housing has an unusual split personality between being an investment but also being a consumption good," Mr. Rosenberg says.
He says that feeling about being wealthy because of the value of your home is not unusual and people will spend based on that perception.
"There is nothing that dominates consumer spending more than employment and income, but you can get into other layers that affect consumer spending and confidence and the wealth effect is pretty important," says Mr. Rosenberg, noting 20% of Canadians own stock but 70% own a home. "On the household balance sheet, the house is the bedrock. Seeing your house price go up, believing -true or not -that you are wealthier will trigger the subconscious decision to reduce your savings rate."
Interestingly enough, the savings rate in Canada in 2011 is down to 3.51%, according to the Deloitte study. The U.S. savings rate climbed to 6.26%.
Edmonton-based certified financial planner Al Nagy, of Investors Group, says he doesn't consider the value of a home as part of a retirement plan.
"It's part of the net worth, but ultimately, the home is a roof over your head and typically it is not used as source of funding," Mr. Nagy says. "I still include the house when I calculate net worth because people really want to know what their tangible net worth is."
It's one thing to know what your net worth is, but if it's tied up in your house and you don't ever plan to sell, even if the Canadian housing market doesn't fall apart, what's it worth to you?
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