Home is where the savings are: new study from Scotia Economics.
January 18, 2005 - Canadians are putting their savings into their homes instead of financial assets, according to a new report from Scotia Economics. The report states that a prolonged period of low returns in financial markets has encouraged Canadians to take advantage of generational low interest rates and rising home values.
The bellwether national rate of savings – the difference between current personal income and expenditures measured as a share of disposable income – had effectively plunged to zero in the July 2004 to September 2004 period, according 
to the report. This marked a low point in the 22-year declining trend from the savings rate of 20 per cent set in 1982.
"This development is particularly relevant to the issue of saving, since real estate investments, home buying as well as renovations, are not included in the conventional methodology for determining the national savings rate,” said Aron Gampel, Deputy Chief Economist at Scotia Economics, who noted that statisticians consider this a form of consumption.
Capital gains, both realized and unrealized, accruing from investments in both real estate and financial assets are also not counted. The conventional savings rate also excludes contributions of Canadians to social insurance and employee pension plans – non-discretionary savings that are deducted directly from paycheques. Simply adding back these deductions would lift the measured savings rate above eight per cent, according to Gampel.
Looking at the performance of household balance sheets presents a much brighter snapshot of the financial well being of Canadians, owing in part to rising home prices and rising home ownership rates. Total assets have climbed to record levels, pushing the collective net worth of households to an all-time high of almost six times annual personal disposable income in 2004. The increase in net real estate and financial assets as a share of after-tax income – an alternative broader measure of savings – has averaged roughly 35 per cent in 2003-2004, above its long-term trend of close to 30 per cent.
"These broader measures highlight that collectively, Canadians are not in the dire financial straits suggested by the precipitous drop in savings out of current income," said Adrienne Warren, Senior Economist.
The report also found that Canadians are not taking full advantage of their RRSP room. In the 2003 tax year, 5.9 million Canadians made a contribution to an RRSP, down from 6.3 million in 2000, representing just 34 per cent of eligible taxfilers. Total contributions of $27.6 billion represented only nine per cent of the total room available to these tax filers. The median contribution has remained steady at roughly $2,600 since the beginning of the decade, despite expanded contribution limits.© Copyright Canadian Real Estate Association 2005