A recent post by Ben over at financialinsights highlighted a BMO report on RRSP vulnerability as a savings vehicle in Canada. Most notably, BC stands out like a sore thumb when it comes to savings rates, defined roughly as the percentage of disposable income not spent:
For 1.5MM households with average income of $75,000, a -4.2% savings rate means spending $4.8BB more than the province’s $113BB reported personal income.
The low savings rate is nothing new and Doug Porter at BMO has opined a low savings rate isn’t necessarily a bad thing if asset prices are increasing:
“While debt has risen to record heights, so, too, have financial assets due to a rebound in equities and an underlying rise in savings”
BC Stats, in its heyday, has released a few interesting reports on savings rates. Here (pdf) is one from 1994, where they state the following observations based on analysis of data from the mid-1960s to 1994:
Remember this report was published 17 years ago now! Since then, BC’s savings rate has moved negative. There was a more recent paper on savings rate published by BC Stats — I cannot find it any more online — where there was more analysis of the savings rate question as a negative savings rate seemed to indicate a structural problem with the provincial economy.
The question is, therefore, does BC’s chronically negative savings rate portend a significant structural problem with the economy, or are there other factors at play? There are a few potential answers, including:
- Unreported income, from internal and external sources,
- High net worth due to assets accumulated during non-residency
- Borrowing against, or selling, existing asset equity
- Assets held by BCers are growth, as opposed to value, oriented.
All must be occurring in a greater proportion to other provinces. A recent TD report provides some guesses on which of these could be having an effect:
Reflecting the lofty costs of homeownership, households in British Columbia record the highest vulnerability. In particular, B.C. residents on average register the highest debt-to-income ratio, debt-service cost, and greatest sensitivity to rising interest rates. What’s more, B.C. is the only province where the average savings rate is negative. None of this is new, however, as the province has systematically been the most vulnerable since the start of our data series in 1999. The structural nature of this challenge suggests that there maybe factors at play that are not being captured in the aggregate data. For example, the province’s relatively large economic reliance on its service sector and self-employment – two areas that tend to have higher-than-average incidences of non-reported income – might be superficially driving down income and driving up the various sub-index readings.
In addition, B.C. households appear to have adopted coping mechanisms, such as renting out basement apartments, which might not be fully factored into the income side. Even if these factors are part of the story, they don’t address the fact that British Columbia’s [debt] index level has recorded the second fastest rate of increase among the provinces over the past half decade. Higher interest rates over the next few years threaten to leave as many as one in ten households in B.C. in a position of financial stress. On the plus side, rapidly-appreciating home prices in the province has left the debt-to-asset ratio – a metric of household leverage – below the Canadian average. Still, with the home price-to-income ratio pointing to some ongoing over-valuation in the housing market, stable B.C. home values are far from assured.