An age-old question about the 'rebound' in the wealth of Canadians

Yesterday the Globe and Mail had a story about how the wealth of Canadian households had rebounded last quarter, after declines for most of the last year. While this is seen as positive news in regards to our economic health, I believe there’s an important element the report leaves out – wealth of Canadian households by age-group. My hunch is that older Canadians got a fair bit wealthier during this time period, but younger Canadians – on aggregate – treaded water while lurching into ever-greater debt. And it is this group of Canadians that I’m concerned about.

The reason I started thinking about this was simple. The article presents two key facts:

1. The resulting increase in the value of household financial assets (including shares, mutual funds, and pension assets) was the principal factor behind the rise in household net worth.

2. The use of credit also rose more quickly in the quarter, with notable borrowing for mortgages as resale housing markets picked up.

Now the argument is that, on aggregate, the increase in #1 more than offset the increase in #2. But think about it in terms of age-groups. The increase in the value of household financial assets (shares, mutual funds, etc.) flows disproportionately to older Canadians. After all, on average they have far more invested than younger Canadians. In contrast, the increased use of credit (i.e. getting mortgages) is likely driven by younger Canadians – more likely to be buying their first home, upgrading, etc.

So while it’s all fine and good to say that, overall, household debt and a percentage of net worth decreased in the quarter (good news!), what I’d really like to see is this broken out by age group. My hunch is that household debt as a percentage of net worth for older Canadians declined by a fair bit, while the household debt as a percentage of net worth for younger Canadians might have even increased.

Why this matters is because debt as a percentage of net worth as a good indicator of the risk our economy is facing – particularly if interest rates start to rise (which Garth Turner, among others, believes is absolutely going to happen) again someday. If- and again I say if because it’s just a hunch – we’re in a situation where the younger Canadians are racking up huge piles of debt to buy houses and things, and in general they have very few other financial assets, this “rebound in wealth” might be a bit of an illusion. And if it is an illusion created by nothing other than the dramatic decline in interest rates, we have more than a few data points from recent history indicating that it will not end well.