With the annual RRSP season set to wrap-up on March 1, Scotia Economics has released a study highlighting RRSP trends. The report reveals a strong investor preference for real estate to bolster investment returns. However, this trend may be rebalancing towards more traditional financial investments due to changing economic factors, such as the cooling off of Canada’s hot housing market.
“Are Canadians financially challenged to contribute to their RRSPs or are they challenged financially to broaden their investment horizons?” commented Aron Gampel, vp and deputy chief economist at Bank of Nova Scotia, on the issue of Canadians’ lagging RRSP contributions in recent years.
“While Canadians are utilizing RRSPs as part of their retirement strategy, many of them are not taking full advantage of this important tax-deferred savings option,” noted Gampel. “Annual contributions have not kept pace with allowable limits, so a significant unused gap has developed.” He added that a recent Scotiabank study also highlighted that an increasing number of Canadians are now cashing out some of their RRSPs and accepting the early withdrawal tax penalty.
“Although Canadians have been increasingly diversifying their wealth-generating investments, primarily in real estate, they should consider the advantages provided by RRSPs to maximize the growth and performance of their retirement savings,” observed Gampel.
The report suggests that the issue of lagging RRSP contributions is not simply a matter of funding challenges faced by consumers. Rather, it reflects that Canadians have made some fundamental decisions regarding their investment and spending priorities in recent years.
“The availability of funds is not likely the critical issue since the Canadian economy has been generating, on average, comparatively steady employment, income and economic growth over the past decade,” observed Gampel. “For many Canadians, paying down debt has taken a higher priority. For others, lifestyle changes may be at play. For example the rapid pace of technological change in consumer electronics, may be contributing to a ‘spend now, save later’ momentum.”
“Many Canadians have simply turned their attention to non-financial investments, such as real estate, that could potentially provide them with the financial flexibility and resources that they will need during their retirement years,” Gampel indicated.
Citing a Statistics Canada study on both the size and distribution of the financial and non-financial assets of Canadians, real estate won first place as the primary asset of choice, with total real estate holdings amounting to $2.4 trillion in 2005, or 42% of total savings.
The cumulative 56% growth in real estate assets between 1999 and 2005 — both primary dwelling and vacation/investment properties — occurred during a time of sustained increases in land and home prices, and a period of generally less buoyant conditions in the stock market.
Employer-Sponsored Registered Pension Plans (EPPs) were the second place contributor to the increase in Canadian savings, reflecting 18.5% of total savings in 2005. However, RRSPs and other personal retirement accounts placed a distant third of Canadians’ savings at just 10.5%.
The report adds that a rebalancing of Canadian personal investment appears to be getting underway. “Investments in real estate have probably lost some traction, while purchases of financial assets have likely regained some momentum,” noted Gampel.
There are increasing signs that the hot housing market has begun to cool off, with record prices cutting into affordability, sales, and construction activity. At the same time, equity markets at home and abroad began moving considerably higher in response to the continuing strength in international economic growth, a stable interest rate environment, and the continuing solid demand for commodities.
“The changing performance of real estate assets versus financial investments will likely continue to have an impact on how we decide to allocate our savings in the months ahead, though non-financial assets are likely to remain a big part of the diversification plan of Canadians for the foreseeable future,” concluded Gampel.
According to Gampel, “With an eye on their retirement years ahead, Canadians are likely to focus more on traditional savings vehicles, and take advantage of the opportunities presented by RRSPs – compounded returns and deferred taxes — for domestic and foreign stocks and bonds, including mutual funds.”
Canadians prefer non-financial investments to boost savings
Real estate investments may finally be losing their appeal, says Scotia Economics
- By: IE Staff
- February 27, 2007 October 31, 2019
- 08:00