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The Epoch Times
Canada is America’s largest trading partner. The reasons Canada has come out of the 2008-2009 recession virtually unscathed is murky to most Canadians and all Americans. Some of it was dumb luck and/or the holding back on innovations.Space limitation allows for a thumbnail sketch only of the differences in style of business in Canada vis-a-vis the United States.
Banking Industry
Canada’s five major banks, with thousands of branches, pleaded with the government to be allowed to merge, evolve into 2 or 3 multibillion dollar banks able to underwrite big deals, big enough to match Wall Street’s behemoths. The government said, “No, you’re likely to close unproductive branches in rural areas.” The banks tried to con the finance minister, claimed they would keep all branches open. The federals wouldn’t budge. The banks got lucky.
Royal Bank of Canada, Toronto Dominion, and CIBC went into the U.S. market anyway. CIBC got badly burned in the Enron fiasco where it settled with the SEC for $1 billion dollars. RBC and TD have had better luck, with TD expanding with commercial branches in the northeast and southern United States.
The Housing Market
There doesn’t seem to have been a single foreclosure in Canada. Prices are still rising in some locations, dipping in others. In the United States, folks don’t care to build up equity since mortgage interest is tax deductable. Furthermore, availability of a 30-year mortgage allows one to get by with minuscule amounts of principle being paid. When home prices rose, the tendency was to apply for a second mortgage treating one’s home like an ATM machine. In Canada, to buy a home, a substantial down payment is required, and credit worthiness is a prerequisite. One is offered a fixed rate (amortized over 20 years) mortgage for up to five years only. Interest is not deductable. The mortgage is insured for a small fee by the Canadian Housing Authority and is held by the issuing bank to maturity. All in all, it was an old fashioned way of doing business.
Living Standard
A little known fact is that, in Canada, a good three-quarters of the population is middle class. While per capita income is lower than the United States, the social safety net, including the National Health Plan, offsets the difference. The fabricated stories of mistreatment, waiting periods, death panels, and more, are just that: malicious rumours spread by those interested in maintaining the U.S. status quo. What puzzles many visitors to Canada is an absence of slums.
Climate
A good many Americans from above the Mason Dixon line retire, and establish permanent residence in the sunbelt. Naturally, Medicare services in such locales are strained, increasing costs. Canadians who wish to avail themselves of the Health Plan stay at home. There is no sunbelt to retire to, and no trailer parks. The benefit of this lower mobility is more stable home prices and adequate medical staffing.
Immigration and Government
Major cities in Canada, (about six), are a polyglot of nationalities. There are no racially segregated areas in Canadian cities, just segregation by housing costs. There is little friction, perhaps because, with the exception of some parts of the Maritimes, Canada is a country of immigrants. Canada does not have a land border with an underdeveloped country. Illegal immigrants that get in, usually by air, can apply for asylum. While they wait for an immigration panel to adjudicate their case, they are free to find work and obtain some subsidy, if needed. A costly affair, but it does provide for peaceful society.
In the recent era, governments of all political stripes, to stave off defeat in a vote of confidence, which brings on an election, managed Canada’s affairs from the center. The current right-wing, minority government is no different. Partisanship is mostly rhetoric. A law passed by the House of Commons (component of Canadian government of elected officials) gets an easy pass from the unelected Senate. There is little drama, and few surprises.
Manny Drukier is a columnist for the Epoch Times. His weekly feature, “The Practical Entrepreneur,” appears every Thursday in the Business section.
Statistics Canada has published a 2006 study labeled “Impact of home equity on incomes of retirement-age households”, that shows how the equity that homeowners have built up through a lifetime of investment in their homes makes an important contribution to household finances as they enter retirement.
By retirement age, 75% of households are homeowners, and of those, 74% own their homes without a mortgage.
The economic benefit of owning a home is equivalent to the rent that does not have to be paid.
In 2006, when the value of this benefit was taken into account for households headed by individuals in the age group 60 to 69, it increased incomes by $5,500 or 10%.
For households headed by those in the age group 70 and over, incomes rose by $5,400 or 12%.
For households in the age group 70 and over whose household income was ranked in the bottom 20%, home ownership raised incomes, on average, by about $4,200 or 20%.
For households in the same age group whose income ranked in the top 20%, income increased by $10,400, but, in proportional terms, by a more modest 7%.
Note to readers
Recently, concerns have been raised as to whether Canadians are prepared for retirement.
Using data from the 2006 Survey of Household Spending and the 2006 Census of Population, this study estimates the contribution to household finances generated by the home equity of working-age and retirement-age households.
Net income is defined as gross income less income taxes and payments made for Employment Insurance, life insurance, annuities, and public and private pension plans. The benefit of home ownership is defined as the value of housing services provided by home equity. The value of housing services is based on estimates of the financing costs of owning a home and the rents paid for housing.
The research paper “Incomes of Retirement-age and Working-age Canadians: Accounting for Home Ownership,” is now available as part of the Economic Analysis (EA) Research Paper Series (11F0027M2010064, free) from the Key resource module of our website under Publications.
Consumer prices rise in June
Statistics Canada has just released its Consumer Price Index for June that shows that prices rose 1.0% in the 12 months to June, following a 1.4% increase in May.
Energy prices rose 1.3% between June 2009 and June 2010, after increasing 6.2% over the 12 months ending in May. Excluding energy, the Consumer Price Index (CPI) advanced 0.9% in June, following a 1.0% increase in May.
The price of gasoline decreased 2.9% in June compared with the same month a year earlier, after rising 6.9% in May. This was the first year-over-year drop in prices at the pump since October 2009.
Natural gas prices increased 3.0% in June, after rising 4.7% in May. This was the third consecutive advance following several months of decline.
Electricity prices rose 5.8% in June following a 4.0% advance in May.
Prices for the purchase of passenger vehicles rose 2.8% in June, following a 5.1% increase in May.
On a seasonally adjusted monthly basis, consumer prices fell 0.2% in June, the same rate of decrease as in May. Both the transportation and the clothing and footwear indexes fell 0.7% while food prices decreased 0.1%.
Prices increased in seven of the eight major components of the CPI in the 12 months to June; the only exception was clothing and footwear.
Shelter costs rose 1.6% in the 12 months to June, after increasing 1.3% in May. Homeowner’s replacement costs rose 5.2% following a 4.4% increase in May. In addition to paying higher prices for natural gas and electricity, consumers also paid more for rent.
On the other hand, the mortgage interest cost index, which measures the change in the interest portion of payments on outstanding mortgage debt, declined 5.0% in June, following a 5.4% decrease in May.
Despite the year-over-year decline in gasoline prices, transportation costs rose 1.0% in the 12 months to June after increasing 4.1% in May. In addition to paying higher prices for the purchase of passenger vehicles, consumers also paid 5.3% more for passenger vehicle insurance premiums.
Consumers paid 1.2% more for household operations, furnishings and equipment. This increase followed a 0.9% rise in the 12 months to May. Higher prices were recorded for telephone services and child care. Costs for financial services fell 2.8%.
Food prices went up 0.7% in June following a 0.8% increase in May. The increase in June was the smallest since March 2008. Prices for food purchased from restaurants rose 1.8% while prices for food purchased from stores increased 0.1%. Prices increased for sugar and confectionery, tomatoes and lettuce, while prices for oranges and potatoes fell.
Prices in the health and personal care component were up 1.7%. Prices for oral-hygiene products and dental care increased.
In the recreation, education and reading component, prices rose 0.4% after falling 0.2% in the 12 months to May. Consumers paid more for cablevision and satellite services. However, prices for video equipment and computer equipment and supplies fell.
Prices for clothing and footwear declined 1.8%. In this component, lower prices were recorded for women’s and children’s clothing.
Apart from Manitoba, consumer prices rose in all provinces in the 12 months to June, but at a slower pace than in May. Prices at the pump fell in most provinces.
The fastest rate of change occurred in Ontario where consumer prices rose 1.6%. Prices for the purchase of passenger vehicles were up as were passenger vehicle insurance premiums. Ontario consumers also paid more for electricity and telephone services.
In Manitoba, consumer prices decreased 0.2% in the 12 months to June, following a 0.5% increase in May. Lower prices for gasoline, natural gas and home and mortgage insurance were recorded in this province.
In British Columbia, prices advanced 0.5% in June, following a 0.6% increase in May. Electricity prices rose 21.7% while prices for home and mortgage insurance declined.
The Bank of Canada’s core index advanced 1.7% in the 12 months to June, following a 1.8% rise in May. Price increases were recorded for the purchase of passenger vehicles, passenger vehicle insurance premiums, homeowner’s replacement costs, electricity and telephone services.
The seasonally adjusted monthly core index increased 0.1% in June, after increasing by the same amount in May.
For more information, or to enquire about the concepts, methods or data quality of this release, contact the Dissemination Unit (toll-free 1-866-230-2248; 613-951-9606; fax: 613-951-2848; cpd-info-dpc@statcan.gc.ca), Consumer Prices Division
By Sunny Freeman,
The Canadian Press
TORONTO – Recession-battered Canadians are growing more conservative with their money and turning away from high risk investments to the safety of savings accounts — a trend that banks are cashing in on, industry insiders say.
Canadians this year have opened about 20 per cent more chequing and savings accounts than last — a giant leap from the average three to five per cent annual increase, said financial services consultant David McVay.
“Canadians are more conservative than they were in 2007,” McVay said, adding that more consumers are paying off debt, opening RRSPs and tax-free savings accounts than they were a year ago.
“We’re seeing a shift from stock investing into keeping more money in savings accounts because of the financial crisis,” he said.
The shift to safer investments is being driven by a nervous baby boom generation who “have lost their mojo” after the plunging stock market wreaked havoc on their retirement investments, McVay said.
They no longer want to take on the risk of a crash that could force them to work another five or 10 years.
“The banks are marketing to the uncertainty that Canadians have about their savings and retirement plans caused by the financial crisis,” McVay said.
Banks are looking to capitalize on the conservative shift in consumer sentiment because they can make more money from savings accounts than they can when stocks and bonds are in vogue, he added.
The 20 per cent increase in retail accounts amounts to about $100 billion in business — and Canadian banks are fighting aggressively for customers with cash-back and points incentives, McVay said.
TD Bank economist Grant Bishop agrees that the trend away from risky equity markets has increased competition for deposits.
“You did see banks increasing the attractiveness in order to get the largest bulk of that cash flowing in,” Bishop said.
But the rush into precautionary savings during the initial phases of the recession, has since dropped off, he added.
As the early stages of recovery took hold, consumers began to take advantage of historically low interest rates and favourable borrowing conditions.
“We did see households, spurred by ultra-low interest rates, accumulating debt, largely for the purpose of home ownership,” he said.
“But going forward that does need to slow and households do need to save more in order to rebalance their finances and bring down the potential vulnerabilities that households would face as interest rates rise.”
As interest rates on loans begin a cycle of gradual hikes, borrowing will become more expensive. As the same time, that should eventually translate into higher interest on savings accounts.
Scotiabank released results of a survey of Canadians’ savings habits Tuesday that found nearly one-third of Canadians do not have a savings plan in place even though almost everybody —94 per cent— said they feel better when they have a safety net of savings.
That means there is still a large untapped market of Canadians who are looking for help with their savings.
“We did have a tough period in the last few years and I think now is a great time to really focus on this and get people thinking about how they can save,” said Gillian Riley, Scotiabank senior vice-president of retail deposits, payment and lending.
“Over the last year we certainly have seen some movement towards savings as a flight to safety,” Riley added.
About 55 per cent of the 1,000 Canadians surveyed by Harris/Decima for Scotiabank in March told pollsters they save on a regular basis. Still, nearly one-in-five Canadians said they don’t have any rainy day savings at all.
Household consumption had been growing at a faster rate than income growth, indicating that Canadians were taking on more debt to fuel domestic spending, Bishop said, adding that TD predicts that the pace of credit growth will slow in the near future.
The personal debt to income ratio has climbed dramatically in the past year, Bishop said. It sits at around 147 per cent, meaning for every dollar of income households earn, they hold about $1.47 in debt.
“That reflects that households still do need to save a larger portion than they were during the pre-recession period … in order to pay down debt.”