BC Negative Savings Rate: Does not Compute

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:

  • there is a positive correlation between changes in the unemployment rate and savings rate
  • Interest rates are also strongly correlated with BC’s savings rate
  • British Columbians have consistently lagged behind other Canadians in terms of how much of their disposable income is saved
  • Lower savings rates may have to do with: higher consumer prices, age demographics, and lower income growth.
  • 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.
    • Others?

    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.

    Emphasis mine.

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    Anonymouse
    Guest
    Anonymouse

    "Assets held by BCers are growth, as opposed to value, oriented."

    Growth as in plants?

    vreaa
    Member

    Great, so we have a larger underground economy than anywhere else in the country. We love how TD puts it: "which might not be fully factored into the income side."

    Good post, thanks.

    VanRant
    Guest
    VanRant

    Looks like BC is going to get plowed under when this housing bubble pops!

    vreaa
    Member

    For anyone who may have missed this at the end of last thread:

    52% Backed By Real Estate –

    Analysis Of Contributions To Campaign Of Christy Clark, New Leader of the BC Liberals

    Percentage of all contributions coming from contributors with known RE industry affiliation: 52.1% ($267,250 of $513,200)

    http://wp.me/pcq1o-1UX

    Responsible Y
    Guest
    Responsible Y

    I just saw an ad for Rennie and Associates that listed all of his realtors in the Vancouver Sun.

    Out of 52 on the page, 34 were Asian, or 65% of his salesman were asian. With that type of marketing force, why hasn't he sold out the Olympic Village to hot asian money (HAM) yet????????

    Come on, if your own "culturally sensitive" agents cannot sell to HAM who can????

    coastal
    Guest
    coastal

    @vreaa: "Great, so we have a larger underground economy than anywhere else in the country. We love how TD puts it: “which might not be fully factored into the income side.”"

    Maybe there's a double edge to that one and he also meant those with grow-ops.

    pedobear
    Guest
    pedobear

    http://www.vancouversun.com/mobile/news/vancouver

    Anyone else think this article has a differing tone from the title? Also its strange how it has no author.. Just says by vancouver sun

    Midnite Toker
    Guest
    Midnite Toker

    Good news everybody! We're going to have a soft landing 😉

    http://www.vancouversun.com/business/Soft+landing

    Eddie
    Guest
    Eddie

    "HAM" won't save our real estate, just like "HLM" (Hot Latin Money) couldn't save Florida's.

    Here's a Miami Herald article from 2004… SOUND FAMILIAR?

    http://www.latinamericanstudies.org/latinos/mexic

    JR
    Guest
    JR

    @pedobear: Funny how the market with the worst metrics not only in the country but well beyond the continent is still cited for its potential to "out perform" against a backdrop of flatness and downhill rides elsewhere. What's exactly in that Koolaid?

    Best place on meth
    Member
    Best place on meth

    So, Doug Porter at BMO has opined a low savings rate isn’t necessarily a bad thing if asset prices are increasing.

    Well Doug, asset prices can fall hard but the debt stays the same.

    That's why people end up "underwater", buddy.

    registered
    Member
    registered

    @9 Eddie: 'HLM' doesn't fit the standard Vancouver 'A' pattern, to date:

    Hot Albertan Money

    Hot American Money

    Hot Asian Money

    Patiently Waiting
    Member
    Patiently Waiting

    @pedobear: Yeah, no self-respecting journalism would put their name on it.

    taylor192
    Member
    Continuing the restaurant discussion from yesterday: The restaurant industry has increased more than virtually every other industry in the last decade. I cannot find the article, yet someone broke down the growth and it was ridiculous how many restaurants had opened in the past decade. Thus the restaurant industry, like housing, was due for a pull back. People can scape goat the HST or liquor laws, yet the reality is the restaurant industry outgrew its market. Add in a recession, negative savings, high debt, high housing costs, and staple consumer goods price increases and there's not a lot left over for eating out. This is more than evident if you visit Safeway. Safeway has been cutting prices. Why would Safeway be cutting the prices of the same goods that are increasing in price on the commodities markets? They were losing… Read more »
    CRASH JPMorgan-Chase
    Guest
    CRASH JPMorgan-Chase

    Any further rise in the CAD will crash our economy and bring home prices down. Commodities have a long way to go. New all time high today for AU

    victoria
    Member
    victoria

    How come prices are so high in Victoria (just under Vancouver) but no Chinese from Mainland China are coming here buying up property. It used to be the Albertans but I think they are long gone.

    Any insight?

    4444
    Guest
    4444

    @vreaa:

    52% Backed By Real Estate –
    Analysis Of Contributions To Campaign Of Christy Clark, New Leader of the BC Liberals
    ————————————-

    At some point this is going to get interesting, do the politicians pay back the developers for the generous contributions, and let the bubble pop, or restrict land supply to keep the bottom from falling out, to continue the illusion of wealth ? and kill all the construction jobs?

    The walls are closing in.

    Bag it and tag it
    Member
    Bag it and tag it

    @JR: RE: HLM. Nice find.

    At least latinos don't pick their nose and fart openly in public.

    Bag it and tag it
    Member
    Bag it and tag it

    @IT_Pro: oops, my last post was supposed to be @Eddie

    specialfx3000
    Member
    specialfx3000

    Watched the 'news' yesterday and they talked about Canadians not having money in their savings account nor contributing to their RRSP.

    People they interviewed expressed that they do not have money for that kind of stuff as they are over-leveraged and can't seem to find money to save. Yet these interviews are with people at the malls shopping. There's a lady with a pretty nice outfit.

    Here's a suggestion. Control your spending at the malls. That Coach bag is not a necessity. Bam, there's a few bills you can now put towards your RRSP.

    VHB
    Member
    VHB

    On my VOW: Lots of people changing prices upward, or canceling and putting out a 'new' listing with a higher price.

    Will these HAM fishers find success?

    Bag it and tag it
    Member
    Bag it and tag it

    @Victoria: Speaking of Victoria, prices are down about 8% from the highs.
    http://www.vreb.org/pdf/vrebgap.pdf
    I'd be curious if they have a chart of the median prices, since they are consistently much lower than the averages. If I get bored I'll make my own by picking through the historical monthly releases. It doesn't seem benchmarks are available for Vic either.

    patriotz
    Member

    "Assets held by BCers are growth, as opposed to value, oriented."

    A growth asset is one that currently has a high price/earnings but has a reasonable expectation of earnings increasing to lower the P/E. Like, say, Microsoft after its IPO.

    Not to be confused with a bubble asset, which also has high P/E but has no prospects of increased earnings.

    For stocks it can be hard to tell the difference, since future earnings are uncertain, but for RE future earnings (rent) are highly predictable.

    Now which asset accounts for most of the (paper) wealth in BC?

    History X
    Guest
    History X
    On my VOW: Lots of people changing prices upward, or canceling and putting out a ‘new’ listing with a higher price. Will these HAM fishers find success? **** Um – yes… HAM fishers have had success for the past 25 years, hence the correlation between the first HAM influx in the mid 1980s from HK and the shift to paying a premium for housing in Vancouver (to the 5:1 price to income ratio) Why does anyone dispute this still? What, 25 years of rich asians coming here and driving up prices is not empirically valid enough? I know, give it another 25 years of debating whether it exists, and its relative impact, before you decide if it is real or not. You guys will probably still be debating its existence then, wondering when the inevitable crash will happen so you… Read more »
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