Consumer Trends Report – Chapter 6: Consumer Assets

Chapter 6 — Consumer Assets

Income is only a partial indicator of the ability of consumers to participate in the marketplace. For example, an elderly individual may have a relatively low income, but live quite comfortably in retirement by drawing on an accumulation of assets; or a temporarily under-employed person may supplement his or her current income by taking on additional debt. On the other hand, persons with very high incomes may experience severe financial stress if they are also servicing large debts. Thus, wealth (or net worth) provides some additional insight into the financial situation of Canadians. The next three chapters examine broad trends in assets, debts, and net worth, during the period from 1984 to 1999, as well as the financial position of some key demographic groups of consumers.

The Survey of Financial Security: analytical implications

Cross-section data (1999 data) presented in this chapter are from Statistics Canada's 1999 Survey of Financial Security (SFS). Time-series data (comparing 1999 data to Statistics Canada's previous wealth survey of 1984) are mainly from a custom data request performed by Statistics Canada. A few points are worth noting about these data. Unless otherwise stated, the time-series comparisons represent trends based solely on these two survey years. Also, because of differences in survey content, these time-series comparisons are based on adjusted 1999 data, i.e., certain assets are removed from the 1999 data because comparable information does not exist for 1984. Finally, these time-series comparisons are reported in constant 1999 dollars, i.e., the impact of inflation is removed. (See the Appendix for more details on the SFS.)

Similar to Statistics Canada's main publication on net worth (Cat. No. 13-595), this chapter focuses on median, as opposed to average, values. Unlike average values, the median is not influenced by a skewed distribution of net worth (due to the extremely high net worth of a relatively very few Canadians). Median values, therefore, give a closer approximation of the "typical" Canadian household.

It is recognized that, beyond income, assets also play an important role in consumers' well-being:

We know intuitively that savings and assets are as important to our overall financial and economic security as income. Anyone who has ever applied for a mortgage, sought the advice of a financial planner, or applied for social assistance benefits knows first-hand that any savings, however modest, can be an important economic resource. …Assets can also enhance social capital, participation, and inclusion. For example, homeowners appear to have higher levels of civic engagement than do non-owners and enjoy better marital stability, family health, and well-being among dependent children (Nares and Robson-Haddow 2003, 51).

Assets can be categorized in two main groups: non-financial assets (principal residences, vehicles, etc.) and financial assets (deposits in financial institutions, RRSPs, etc.). In total, the aggregate amount of assets held by Canadians increased, in real terms, from $1.4 trillion in 1984 to $2.6 trillion in 1999. Part of this increase is attributed to a larger population: the number of family units in Canada increased from 9.5 million in 1984 to 12.2 million in 1999.184 However, a growing population accounts for only part of the increasing value of assets. Comparing 1984 to 1999, the median value of assets of Canadian family units increased from $92 722 to $124 500 (see Figure 6.1).

Figure 6.1 — Median Asset Holdings: 1984 versus 1999,* All Family Units** (Medians Based on Those Reporting Ownership, in $1999)
  1984 1999
Median ($) % Reporting Median ($) % Reporting

Note: Unlike average values, median values are non-additive, i.e., the sum of the individual categories does not equal the total.

*1999 data are adjusted to be made comparable to 1984 data. Back to text

**All family units include both economic families and unattached individuals. Back to text

Source: Statistics Canada, SFS, custom tabulations.

Financial Assets 8 704 94 15 000 96
RRSPs/Locked-In Retirement Accounts 9 459 29 20 000 57
Deposits in Financial Institutions (Non-RRSPs) 4 368 92 2 670 91
Mutual Funds/Stocks/Bonds (Non-RRSPs) 5 235 36 7 500 31
Other Financial Assets (Non-RRSPs) 6 897 12 5 000 16
Non-Financial Assets 83 526 87 112 000 87
Home 91 956 60 125 000 62
Other Real Estate 45 978 19 65 000 17
Vehicles 7 663 80 9 000 80
Other Non-Financial Assets 4 598 2 5 000 1
Equity in Business 61 304 15 10 000 19
Total Assets 92 722 100 124 500 100
Number of Family Units (Millions) 9.50 12.22

Employer pension plan benefits

This section on assets is based on Statistics Canada's first release of data for the SFS and on custom tabulations. It is worth noting that one important asset is excluded: the value of employer pension plan (EPP) benefits, excluded from the analysis comparing 1984 to 1999 because information about EPP benefits does not exist for 1984. In 1999, EPP benefits represented the most valuable source of private pension benefits. Canadians held $604 billion in EPPs in 1999, compared to $421 billion in other private pension benefits (primarily RRSPs and RRIFs [Registered Retirement Income Funds]) (Statistics Canada 2001b, 10).

The largest asset held by Canadians is their home

The largest asset held by Canadians, on average, is their principal residence, which accounted for slightly over $1.1 trillion in assets in 1999, or 42.3 percent of all assets. This compares to roughly $605.2 billion in housing assets in 1984, which also represented 42.3 percent of all assets (Statistics Canada 2001a, 22).185 The percentage of Canadian family units that were homeowners increased over this 15-year period, from 60 percent in 1984 to 62 percent in 1999. During the same period, the median value of Canadians' principal residence (based on those reporting ownership) increased from $91 956 to $125 000.

According to a recent research article (Tal 2003), housing prices rose 16 percent (in real terms) between 1998 and mid-2003. Taking advantage of this added housing equity and low mortgage rates, Canadian households have been withdrawing money from their homes at an unprecedented rate. CIBC World Markets estimates that between 2001 and mid-2003, cash-out mortgage refinancing added $12 billion to the pockets of homeowners, while home equity loans added a further $10 billion over this same period (Tal 2003). CIBC World Markets notes that this extra cash can be a positive development for consumers if it is used as a means to swap relatively expensive unsecured debt with a cheaper (secured) alternative. It appears, however, that "a larger proportion of the cash borrowed against home equity is used for increased spending" (Tal 2003, 2), rather than for paying off debt.

Many consumers who do not own a home have very weak balance sheets. According to unadjusted 1999 SFS data, the ownership of a principal residence is strongly correlated with net wealth.186 Renters accounted for 39.6 percent of all family units in 1999 and their median net worth was just $8 000 (Kerstetter 2003, 37). This compares to a median net worth of $111 807 for families who were homeowners with a mortgage and $259 200 for those who were homeowners without a mortgage (Kerstetter 2003).

The much weaker balance sheet of renters is apparent when examining public opinion research data on house buying intentions. A 2003 poll reveals that a majority (62 percent) of Canadians who were renters said they were not likely to buy a home within the next two years. When this group was asked why they did not plan to buy within this time, the most common responses related to financial constraints: 37 percent cited "can't afford to buy a home," 11 percent cited "not enough disposable income," 9 percent cited "personal financial concerns," 5 percent cited "can't afford a mortgage" and 3 percent cited "don't have the down payment" (RBC Financial Group 2003).

Other data also confirm the financial stress that many Canadian renters face. For example, a 2001 report notes that the median household income of renters187 in 1999 was $20 947, less than half that of homeowners ($43 478) (Hulchanski 2001, 5). The same source notes that, after adjusting for inflation, the median income of homeowners grew by 5 percent compared to 1984 (from $41 380), but the median income of renters fell by 3 percent (from $21 554). During this same period, the CPI component for rented accommodation increased at an average annual rate of 2.7 percent, compared to only 2.2 percent growth for owned accommodation.188 Perhaps not surprisingly then, the 1999 SFS reveals that 24 percent of families that rent reported falling behind at least two months or more on a bill, loan, rent or mortgage payment in 1998. This was almost double the rate for families that owned a home with a mortgage (13.6 percent) and over four times greater than the rate for families that owned a mortgage-free home (5.7 percent) (Pyper 2002, 19). Taken together, this information implies that besides having very little equity, many Canadians who do not own a home face significant challenges with their basic finances.

As noted by a researcher in urban and community studies, the resulting dynamics in the market for shelter are rather polarized:

Owners and potential owners (higher income and upwardly mobile renters) have the ability to outbid renters for residential land (that is, building sites). In order to compete with condominium developers for land, rental housing developers would have to set rents too high for most tenants. A thriving supply/demand market exists in the homeowner sector, but only demand and social need — without new supply — exists in the rental sector (Hulchanski 2001, 3).

Increasingly varied types of financial accounts

The SFS data in this chapter classify financial assets into four categories: registered plans (includes RRSPs and locked-in retirement accounts) and three non-registered types of accounts (deposits in financial institutions; mutual funds, stocks and bonds;189 and other financial assets). Combined, Canadians had $781 billion in financial assets in 1999,190 accounting for 29.9 percent of all assets.191 This compares to $301.5 billion in financial assets in 1984, which represented 21.1 percent of all assets (see Figure 6.2).

Figure 6.2

Selected Financial Assets as a Proportion of Total Assets, 1984 versus 1999*

*1999 data are adjusted to be made comparable to 1984 data.

Source: Statistics Canada, SFS, custom tabulations, and Statistics Canada 13-595, p. 22, May 2001.

The introduction of low-cost bank accounts in Canada

According to the SFS, almost 1 in 10 Canadian families did not report ownership192 of deposits at a financial institution in 1999. In February 2001, the federal government and eight Canadian financial institutions agreed to help ensure that consumers have access to affordable banking services. The financial institutions agreed to offer accounts that meet guidelines set out by the federal government. Some of the more important of these guidelines are: no charges for making deposits; the customer has use of a debit card; the customer has cheque-writing privileges; 8 to 15 debit transactions are allowed per month, including at least two that can be done in a branch; and a maximum monthly fee of $4. The Department of Finance notes: "The features of these accounts…reflect the views of consumer groups on the desired attributes of low-cost accounts" (Department of Finance Canada 2001), a positive development for some low-income consumers who otherwise may not have access to mainstream financial services.

Source: Financial Consumer Agency of Canada 2003.

Basic savings

There was little change in the proportion of Canadians who reported having basic savings (deposits in financial institutions), when comparing 1984 to 1999: slightly more than 90 percent claimed ownership of this financial instrument in each year. But, while ownership levels remained about the same during this period, the median deposit held in a financial institution markedly declined, from $4368 in 1984 to $2670 in 1999 (see Figure 6.1).193

RRSPs and other investments

The declining use of non-registered deposits in financial institutions is likely due in part to the increasing popularity of other savings and investment instruments. In particular, the strong growth in RRSP ownership rates and contributions has been, by far, the most significant change in the asset profile of consumers over the past two decades. The percentage of Canadians with RRSPs almost doubled between 1984 and 1999 (from 29 percent ownership to 57 percent ownership) and the median amount held increased from $9459 to $20 000 (see Figure 6.1).194 On the other hand, the percentage of Canadians with non-RRSP investments (mutual funds, stocks and bonds) fell from 36 percent in 1984 to 31 percent in 1999, but the median amount held increased from $5235 to $7500.195

There are several potential reasons for the strong growth in RRSPs. The lower return from keeping money in a basic savings or chequing account likely prompted the shift towards RRSPs, as interest rates196 fell from more than 10 percent in May 1984 to less than 5 percent between May and July of 1999.197 Other factors contributing to the rising ownership and contribution rates of RRSPs include the aging of the population, the increased participation of women in the labour force, several legislative changes that occurred between 1984 and 1999, and the annual advertising campaigns by financial institutions.

A brief history of RRSPs

The federal government introduced RRSPs in 1957 to encourage Canadians to save for retirement. Before RRSPs, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income. Several legislative changes have occurred over the decades that have encouraged larger RRSP contributions (including extensive amendments to RRSPs effective January 1, 1991). For example, the maximum RRSP contribution limit in 1986 was the lesser of 20 percent of income or $7500.198 In 1991, the deduction limit was increased to $11 500 and is currently projected to reach $15 500 by 2005, after which it will be indexed (to changes in average wages and salaries).

Source: Frenken 2003, 83-84.

RRSPs offer many potential advantages to consumers. Consumers can increase their current disposable income, via a tax rebate, by contributing to an RRSP. In addition, RRSPs offer the advantage of delaying tax payments, and can also lower the real value of these payments outright (assuming a person is in a lower tax bracket at the time he or she withdraws funds, which is often the case). They can be used towards the purchase of a home under the Home Buyers' Plan. And they also offer consumers the potential benefit of portfolio diversification, since there is not a perfect correlation between different classes of investments over the business cycle. For example, in an economic downturn, one would generally expect interest rates and many stock prices to fall and bond prices to increase (as interest rates fall). Furthermore, mutual funds (an important component of many RRSPs) are often diversified by their very nature, containing various types of securities from many different issuers. Thus, the increasing use of mutual funds as a savings vehicle may insulate their owners from fluctuations in the market to some extent.

RRSPs, not a good choice for everyone?

In a recent study, the C. D. Howe Institute concluded that RRSPs are not an ideal savings instrument for all Canadians, especially those nearing retirement who will qualify for the guaranteed income supplement. The report concludes:

Little or no informed financial advice specific for lower-income Canadians exists, so they tend to accept the same advice widely publicized for the general population: that RRSPs are the most effective vehicle for saving for a retirement. Overall, the effect of the present system is to largely offset, through increased taxes and loss of benefits, the additional income that lower-income Canadians can generate from their retirement savings through RRSPs and pensions. Awareness of the ineffectiveness of saving for lower-income Canadians is limited to experts inside government and in the financial and research community. Not only is the advice in the mass media inappropriate for lower-income Canadians; it is often wrong (Shillington 2003, 7).

The growing popularity of RRSPs and the declining importance of savings held in basic savings accounts have many important implications for a consumer's finances, however. For example, RRSPs may add an element of risk to a consumer's finances, since some RRSPs are more variable than other more traditional savings accounts (e.g. deposits in financial institutions, which, within certain limits, benefit from Canada Deposit Insurance Corporation protection). While low-risk RRSPs exist (e.g. guaranteed investment certificates), those tied to equity markets can be much more volatile. For instance, between August and November 2000, the TSE 300 composite dropped by nearly 2500 points, losing slightly over 20 percent of its value in just three months (see Figure 6.3).

Figure 6.3

TSE 300 Composite Index, 1980–2003

Note: Last data point is November 2003.

Source: Statistics Canada, CANSIM, series v122620.

However, this result must be considered in context: the 1990s, in general, had an unprecedented bullish market, with the TSE 300 composite closing at 8414 points, more than twice as high as where it began the decade (3704). The above data illustrate the potential gains and losses that can be incurred when investing in equity-based instruments. While consumers who invest for the long term are partially shielded from a short-term market downturn, others who require funds in the immediate future (e.g. those wanting to take advantage of the Home Buyers' Plan, or those close to retirement) may be significantly harmed by a volatile stock market.

Financial information is becoming more and more complex

Another consumer issue regarding certain financial instruments, such as mutual funds, is their associated disclosure documents. As mentioned in Chapter 4, evidence suggests that many consumers lack basic numeracy and literacy skills. For example, 22 percent of adult Canadians have serious problems dealing with any printed materials and an additional 24 percent can only deal with simple reading tasks (Statistics Canada 1996). Most mutual funds come with very lengthy disclosure documents, and even for consumers with sufficient literacy skills:

…observations that are frequently made about [mutual fund] disclosure are that:

  1. there is too much paper;
  2. people feel overwhelmed by the paper;
  3. people do not want all the paper/information; and
  4. people will not read the material that is provided to them (Stromberg 1998, 87).

Furthermore, the level of consumer choice in the mutual fund industry has grown substantially in the last decade. The number of mutual funds under management in Canada has almost quadrupled, increasing from 505 in 1991 to 1956 in 2002 (Investment Funds Institute of Canada 2003). While this growing supply of products offers consumers increased choice, the amount of information that must be processed is truly enormous.

It is not just the sheer volume of information available that leads to problems for some consumers. There is also the degree of complexity of this financial information.199 In the growing field of mutual funds, there is no standard against which to evaluate the performance of competing funds. Thus, making comparisons between funds that use different methods to evaluate performance is very complicated. Public opinion research suggests that consumers themselves feel they have relatively little investment knowledge. A 2002 survey showed that only 8 percent of those polled considered themselves to have "sophisticated" investment knowledge, compared to 44 percent who responded "average," 36 percent who responded "limited" and 11 percent who said they had no investment knowledge at all (RBC Financial Group 2003). Other public opinion survey questions that tested Canadians on their investment knowledge echoed these findings. When asked whether the Canada Deposit Insurance Corporation insures mutual funds for up to $60 000, 33 percent of respondents believed that it did and a further 43 percent said that they didn't know. Only about a quarter (24 percent) of those surveyed knew this was not true.200 With such a widespread lack of knowledge:

People are vulnerable to being sold a 'get rich quick' scheme without truly understanding what they have bought, its suitability for their needs, or the 'fine print' that negatively impacts them. People often spend more time comparison shopping for a television set or planning their vacation than they do planning and managing their affairs to meet their current and future financial needs… (Stromberg 1998, 38).

It has been further reported that some consumers find it difficult to distinguish between when they are being given independent financial advice and when they are being sold a product, that is, when the "advisor" is really a seller with a substantial financial interest in the outcome of the transaction (Stromberg 1998, 7). Consumers are also generally not aware of the fees, charges and expenses they pay when investing in mutual funds (Stromberg 1998, 106). So, it is perhaps not surprising that 88 percent of Canadians polled reported that it was "somewhat difficult" or "very difficult" to understand their options as consumers when making decisions about investment products such as mutual funds and RRSPs.201

Research opportunities

There has been a considerable increase in the amount of money being "withdrawn" from Canadian homes (in the form of home equity loans and refinancing). Currently, little is known about the financial situation of homeowners using these options and about what this money is being used for. Given that a home is the single biggest investment for many Canadians and that a mortgage-free home can be an important part of a retirement plan, more research would be beneficial. Further, given how much they lag homeowners in the process of asset accumulation, more detailed analysis of the wealth of renters would also be useful. As recently noted by two researchers on poverty issues: "Just as income support policy has a heritage of robust debate and research, so too can the asset-building field benefit from more debate and research within Canada and abroad" (Nares and Robson-Haddow 2003, 53). Finally, research should continue to investigate potential solutions to, and impacts of, the mismatch between consumers' literacy level and the complex information associated to many financial instruments.

184 Note that some household growth is simply the result of household divisions (e.g. a divorce), which would not affect the aggregate amount of Canadian assets. However, other new households, such as those of recently arrived immigrants, would add to the stock of assets. Back to text

185 Also, Statistics Canada, SFS, custom tabulations. Back to text

186 Data in this paragraph were obtained from the Canadian Centre for Policy Alternatives, from which only 1999 (unadjusted) data are available. Back to text

187 Differences in household income between renters and owners may be influenced by a number of factors, including household size and number of earners. According to Statistics Canada Catalogue 62-202, for example, the average household size for renters was 2.04 in 2001, compared to 2.83 for owners. Back to text

188 Source: Statistics Canada, CANSIM, series v737422 and v737426. Back to text

189 Mutual funds, stocks and bonds are presented as three separate categories in Statistics Canada's main publication (Catalogue 13-595). However, due to small sample sizes in 1984 (when split by age and family type), these items had to be collapsed into a single category. Back to text

190 To make this figure comparable to 1984, the value of annuities was removed from other financial assets. Back to text

191 Percentage calculated using a 1999 figure for total assets that has been adjusted to make it comparable to 1984 data. This adjustment was quite small and did not affect the proportion. Back to text

192 Note that it is possible that some individuals had a bank account with absolutely no money in it at the time the survey was conducted. However, it is assumed that this case would be the exception, and that not reporting ownership of any assets in a bank account is a reasonable proxy for individuals without a bank account. Back to text

193 The median is based only on those persons reporting ownership of a deposit in a financial institution (i.e. null values are excluded). Back to text

194 The median is based only on those persons reporting ownership of an RRSP (i.e. null values are excluded). Back to text

195 The median is based only on those persons reporting ownership of non-RRSP investments (i.e. null values are excluded). Back to text

196 Or, more specifically, the Bank of Canada's bank rate. Back to text

197 The 1984 wealth survey was conducted in May, 1984, and data collection for the 1999 wealth survey was between May and July of 1999. Back to text

198 This limit was the ceiling for non-participants in employer-sponsored registered pension plans (RPPs). The ceiling for RPP participants was the lesser of 20 percent of income or $3500 minus the employee's contribution to the RPP. Back to text

199 A Canadian study found that mutual fund prospectuses require a college/university degree to be comprehensible and were generally found to be "very difficult" to read. See Colbert, Carty and Beam 1998. Back to text

200 Question commissioned by the Office of Consumer Affairs for the Environics Research Group's Focus Canada survey (2002, first quarter). Back to text

201 Ibid. Back to text