Published on Tuesday, Apr. 06, 2010 12:00AM EDTLast updated on Tuesday, Apr. 06, 2010 10:14AM EDT
Pity the publicans, restaurateurs, haberdashers and booksellers, for they are the victims of Canada's increasingly house-poor economy.
The stories are all too common. There's the couple down the street who haven't dined out in years and the kids wearing hand-me-downs, all to make the mortgage payment and cover the interest on the line ofcredit that paid for their home's renovation.
The tales are not apocryphal. The shifting spending patterns are clearly evident in retail sales data.
Canadians are funnelling more disposable income to homes at the expense of most anything that isn't housing related. The government is aiding and abetting this with policies designed to support housing, such as tax credits for renovations and mortgages backed by the Canada Mortgage and Housing Corp.
These policies are often pitched as fuel for an engine of economic growth, one that has the side benefit of providing shelter for Canadians. They get votes, and they work, if the result is measured simply by rising home prices and housing-related spending.
“Once most people have adequate housing, as they do in Canada, does it make sense to continue to focus policies on the sector to drive growth by providing what amounts to more luxury in our homes? ”
But at what cost? A different way to view housing-promotion policies is as stimulus for a growing black hole that sucks light and oxygen from other areas of the economy. Those that don't sell appliances, tools, or something else Canadians can use to make their homes look more like those on HGTV, are losing out.
This is more than a personal finance issue or a monetary policy question about bubbles, it is philosophical.
Once most people have adequate housing, as they do in Canada, does it make sense to continue to focus policies on the sector to drive growth by providing what amounts to more luxury in our homes?
Does housing deserve such emphasis if the effect is to encourage Canada's economy to become more dependant on the home sector, and by extension, on the banks that finance those homes? Is it prudent to encourage the average household to tie so much of its assets up in the house, leaving little for fun or saving?
The biggest policy tool is the CMHC. Through it, the government uses its triple-A credit rating to hold down interest rates for less creditworthy people who want to take out really big mortgages with low down payments. That appears to make homes more affordable but in fact leads to bigger interest charges over the years, leaving less cash for RRSP contributions or university tuition, or just a stress-relieving night on the town.
“The theory is we feel richer, so we spend more, supporting the rest of the economy. Except the figures show the rest of the economy isn't getting as much benefit, and besides, there's a good argument that such thinking doesn't make much sense for a house. ”
Another such tool is the home renovation tax credit, last year's attempt to restart the economy by goosing housing. Yet it's questionable whether housing-related spending needed any help.
Canadian retail sales rose 23 per cent from 2004 to 2008, while most sales related to furnishing and fixing houses have jumped at a much faster pace. Indoor furniture and home furnishings rose 26 per cent, appliances 31 per cent, and hardware and renovation goods 28 per cent, according to the latest detailed figures on Statistics Canada's website. At the same time, sales of clothing, books, sporting goods, drinks at bars and restaurant meals increased at a slower pace than overall spending.
For those Canadians with floating-rate mortgages, that spending skew is going to get more pronounced as interest rates climb.
Getting away from house-first economic thinking also means taking a skeptical look at the idea that the co-called wealth effect from rising housing prices is a significant benefit to the economy at large.
The theory is we feel richer, so we spend more, supporting the rest of the economy. Except the figures show the rest of the economy isn't getting as much benefit, and besides, there's a good argument that such thinking doesn't make much sense for a house.
The result of this so-called wealth created by a more valuable house is often, paradoxically, less disposable income.
As a home's value goes up, taxes generally do too. What's more, short of selling the place and getting out of the housing market altogether, it's tough to get at that so-called wealth to fuel spending.
The main method is refinancing, which the CMHC makes easy. Realtors may argue that taking out home equity to redo the kitchen is a good investment in higher resale value, but the reality is there are upfront costs in the form of interest payments.
The result of Canada's obsession with spending the value in our homes may be less a wealth effect than a variation on the Diderot effect.
That's the unfortunate affliction named for French philosopher Denis Diderot after he found himself caught in a vortex of spending he couldn't afford. His misery was sparked by a beautiful new dressing gown that was so fine, he wrote, that it made everything else in his home look dowdy. So out went his household goods, to be replaced by expensive new stuff.
Such spending leads only to "nothing left in the family strongbox" for things such as education. "The same fatal taste for luxury has ruined great nations," he warned back in 1769.
Substitute granite countertops for a fancy robe, and his words feel awfully apt today.