The average Canadian household has a relatively fixed income stream and works within a budget framework to manage choices related to spending and saving decisions, according to a new report by Altus Group.
The budget choices households make, including those related to housing, change over time and are influenced by several factors, including demographics, the economic environment and personal financial priorities.
A “big-ticket” item, such as a house or a car, not only assumes a large portion of the household wallet, but typically requires planning and financing.
The Altus Group Housing Report stated that expenditures related to “shelter” — mortgage payments, rents, condominium fees, repairs and maintenance, property taxes, etc. — claim the largest wallet share for Canadian households, followed by transportation and food.
Together, these three categories of spending accounted for about 60 per cent of an average Canadian household’s total consumption in 2011.
Shelter alone accounts for just over one-quarter of total consumption for Canadian households. That share is higher for homeowners with mortgages and renters (roughly one-third) than homeowners without mortgages (about one-sixth). Among those with mortgages, about $6 out of every $10 dollars spent on shelter goes towards their mortgage payments.
Demographics also influence consumer choices, including shelter decisions. Depending on where the consumer fits into the demographic “lifecycle,” the decision-making criteria will differ based on their spending habits, needs, income and wealth. Shelter accounts for a declining share of consumption through the empty-nester years, before rising again among seniors.
Households with mortgages account for over half of all dollars spent on shelter overall, with the proportion ranging from less than one-fifth among senior households to about two-thirds for the 35 to 49 year age group. Low interest rates and positive employment prospects enticed consumers to re-open their wallets quickly after the recession. Lost jobs were replaced, supporting consumer confidence and demand for durables, such as appliances and cars.
Expectations are that job growth will continue to be relatively steady, but households will be exhibiting more moderate consumption after having satisfied their demand for big-ticket items. In fact, spending growth has eased more recently, reflecting households’ efforts to contain their debt ahead of potential interest rate increases.
Much attention has been paid to the high level of household debt accumulated in the current low interest rate environment and the risk this potentially could pose to household finances when interest rates rise again. Lower interest rates meant that purchases of homes, renovating and spending on other big ticket items became much more feasible to finance for homeowners.
Household debt — defined as consumer credit and mortgage liabilities, as a ratio of disposable income — reached a peak in 2012, but has slowly started to stabilize, and is now growing in-line with income growth. Tighter mortgage rules, more stringent lending criteria, combined with higher home prices have helped to slow mortgage debt accumulation.
The amortization period for Canada Mortgage and Housing Corporation (CMHC)-insured mortgages was reduced from 30 to 25 years in July 2012. And CMHC recently announced it is limiting guarantees it offers banks, credit unions and other mortgage lenders to $350 million per lender this month, which will affect applications now seeking mortgages.
Both measures are designed to cool hot housing markets in Vancouver and Toronto, but the measures still affect stable, affordable housing markets in cities such as Winnipeg.
According to an Altus survey in the spring, home-buying intentions are still holding up reasonably well, including among potential first-time buyers. Yet for potential first-time buyers to become actual buyers, may require some tough choices and budgeting decisions.
On average, current renters are already committing a sizeable proportion — about one-third — of their spending to shelter payments.
Achieving homeownership may mean choosing a less expensive starter home than first-time buyers in the recent past or cutting back on other expenses, such as foregoing the second car or purchasing a smaller, more fuel efficient vehicle, or delaying home improvements for a bit.