Canada's Housing Bubble

Mar 01, 2011 Ben Rabidoux financialinsights

Canadian GDP was rocking in Q4, though I would like to dig below the surface at some underlying trends.  I’ll hopefully get to that tomorrow.  In the meantime, the two must-reads of the day come courtesy of BMO:

1)  Troubling Trend Sees Canadians Dipping Into Their RRSPs Prior To Retirement

This research report was released on Saturday.  Among the troubling trends:

40% of people with an RRSP have dipped into them before retirement.  However, it should be noted that not all instances where people tap into their registered investments are necessary poor financial decisions.  The First Time Home Buyer Plan is one example.  The Lifelong Learning Plan is another.However, the survey found that only 35% of people who had tapped into their registered savings had done so using these two programs.Emergencies, such as the loss of a job, was the reason given by 36 per cent of respondents while paying off everyday debt, such as credit card balances, was given as a reason by 26 per cent.Sadly (bone-headedly?), 6 per cent of those who dipped into their RSP did so for a vacation or other leisure venture.  Nothing like sacrificing future financial stability on the alter of immediate gratification.  Here’s a great example of marshmallow eaters in action!

Other key findings:

Those in BC (48 per cent) are more likely than those in other provinces to have pulled out money for an emergency

No shock there considering BC’s negative savings rate for 10 years running. Hard to build a cash cushion when you’re living on HELOCs and credit cards.

Thank goodness for a massive (unsustainable) expansion in house prices to give people access to HELOCs or the whole province would really be in trouble.  All jabbing aside, the social fallout of the massive property bubble in BC is becoming increasingly obvious.  VREAA continues to document anecdotes from bright, young professionals who have thrown in the towel on Vancouver and have sought greener and cheaper pastures.  From a balance sheet perspective, two things should be obvious about BC’s current financial predicament:

i)  A credit crunch is increasingly likely.  I shudder to think just how many bank write-offs on unsecured debt will originate in BC once the boom ends.

ii)  The fallout from a house price realignment will bring the BC pseudo-economy to its knees.  Unfortunately, the pain will be acute as all data suggests that many BC residents have little in the way of liquid assets.

2)  Union Backlash to Government Deficit Reduction Plans

BMO chief economist Sherry Cooper weighed in on the plight of public sector unions on both sides of the border in a commentary from today.  Normally I’m not a huge fan of her writing, but Cooper nailed this one.  Some key quotes:

The consternation arises mostly with respect to the pension and health care benefits of these workers, which are more generous than for the private sector, particularly for those working in small businesses.

In the U.S, the public sector remains among the few employers that have not shifted to defined contribution plans. As well, they offer health care benefits at little or not cost to the employee. This has become a touchy issue in Canada as well, as some have questioned the fairness of taxpayer dollars going to the ‘gold-plated’ pensions of government workers.

As an offset, however, public sector salaries are on average lower than private salaries, although it varies from job to job. The gap is greatest for higher-earning job categories.

Labour laws are more favourable towards unions in Canada than in the U.S. This difference is reflected in unionization rates. The U.S. unionization rate is only 7% in the private sector, compared to 16% in Canada. The gap is even greater in the public sector where the unionization rate of public employees is 36% stateside compared to a whopping 71% in Canada.

In both countries, regional governments are trying to cut costs by squeezing public sector compensation and are bumping up against substantial dissent.

I have no problem with the government having to match private sector payrolls to attract quality, but let’s make sure we compare apples to apples.  Rather than look solely at the dollar value of the salary, it would be much more fair to compare the full value of all benefits, including gold-plated and often unsustainable pensions.

Having been a member in the two largest public sector unions in Ontario, I can confidently say that the typical public sector employee is hard-working and diligent in their duties.  My concern has never been with the employees themselves.  My concern has always been that if I’m right about the future, and if large unions approach negotiations with the same ‘pay up or we strike’ mentality, it’s not going to end well.

That being said, I can also say that many in the public sector are completely out of touch with reality.  As one example (and trust me I could give you many), I recently had a discussion with colleague about our pay.  I’ve had countless similar discussions in the past.  The view was that the top-end educator (be they public school, college, or university) deserved their near 6 figure salary and also deserved the 4 percent pay increase per year being sought by the union at that time.  When I asked my colleague what they would be making if they weren’t teaching, they conceded that it would be less than half of their current salary and without benefits or pension.

This has been my concern with large public sector unions.  We are well compensated.  In many cases we are beyond well compensated.  So when the government comes along at a time of significant economic challenges and asks the public sector to consider a temporary year wage freeze, we should give some thought to the plight of many in the private sector before getting riled up.  We would do well to consider our employment and compensation prospects in the public sector before making demands about what we ‘deserve’.  If in fact a public sector employee is underpaid once all benefits are considered, they have a legitimate concern.   If not, they may want to consider voicing to their union reps that perhaps they don’t need to approach the next round of negotiations with an ‘get what we can, not what’s necessarily fair’ mentality.

At any rate….back to the BMO article:

But even in Canada, burgeoning government deficits are forcing the hand of politicians anxious to cut costs. The Ontario Liberals, trying to trim a nearly $19 billion budget deficit, raised the hackles of local unions when they announced in the 2010 budget that they would seek a two-year wage freeze on about one million public sector employees.

The fact is, however, that union workers cannot alone bear the burden of deficit reduction. Regional governments can no longer enjoy some of the big-ticket vote-getting items in their budgets. Changing the terms of union benefits is the equivalent of enforced pay cuts.

Bottom Line:

Nevertheless, expect union power to continue to erode, not just in the U.S.,
but in Canada and Western Europe as well… No longer can employers afford to guarantee lifetime retirement income and health benefits, not even public sector employers.

Hear, hear!

-Ben