The Wealth Effect
Statistics Canada recently revealed that average the average net worth of Canadian households has risen by almost one and a half percent (1.3% to be exact). There is an interesting article in today’s Financial Post, provocatively entitled Expanding House of Cards, pointing out that Canadian homeowners are being both positively and adversely affected by the rise in Canada housing prices.
The 1.3% jump in Canadian household net worth lends to the assumption that, on paper anyways, we have almost completely bounced back from our recession. Factors in this increase in net worth can be attributed to the observed rebound in the stock market as well as the strengthening of the Canadian housing market. Of course, this is all very good news but how are Canadians handling our perceived increase in wealth? Apparently we are handling the good with a little bit of bad. In other words, we are spending, then spending more, and then perhaps going out to dinner afterwards.
While Canadian household net worth has increases by almost one and a half percent, Canadian household debt has actually increased by pretty much exactly 1.5%. Another issue is savings. With spending on the rise, on the other end of the teeter totter, savings is down. These nasty phenomena are attributed to what is called The Wealth Effect.
The Wealth Effect is simply described as thus: when people perceive a higher wealth, perhaps due to a rise in the value of their home, real estate investment, or an increase in stock prices in particular, or their portfolio in general, they tend to spend more.
There may be a slight disconnect between our net worth and actual disposable income, yet as we feel more secure in our investments, the need to scrounge and save dissipates. This will happen even as taxes are increased, prices are inflated, and mortgage rates rise.
