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Rising incomes, lower home prices and falling mortgage rates have improved home ownership affordability, says Desjardins Economic Studies in its latest report.

 

Click here to read Desjardin’s full Affordability Index report.

 

Has anyone noticed that the big push to make people more financially literate in the past few years has coincided with rampant growth in household debt?

 

The most basic lesson of financial literacy: Don’t spend more than you have. The way we do things in Canada: If you don’t have enough to buy what you want, borrow.

 

The easy conclusion here is that efforts to promote financial literacy have been a failure, but that’s wrong. We’ve simply overestimated how quickly and effectively people can be helped to understand money better.

 

It happens that last Thursday marked the start of Financial Literacy Month, where non-profit organizations, government agencies and banks try to give some visibility to a cause that everybody supports because it’s so commonsensical.

 

Click here to read more from the Globe and Mail.

 

Rob Hamilton, 37, and Lisa Aldworth, 33, rent a two-bedroom apartment in Toronto with their one-year-old daughter, Piper. They would like to own a home, but they are $61,600 in debt.

 

“We think saving for a down payment and buying our house in five years is a more realistic strategy,” says Lisa. They would love to stay in the city, but are also considering Guelph, Ontario, since it’s more affordable and closer to Lisa’s parents.

 

Each year this couple spends $9,600 on debt repayment, $5,000 for transportation, $18,000 for Piper’s daycare, and $11,820 for rent – a steal in Toronto. With incidentals their expenses hit $53,920. Rob makes $35,000 working for an arts organization while Lisa earns $74,000 as a social worker, giving them a combined after tax income of just $82,328. That leaves them with $28,408 annually to pay down debt and save for their house.

 

“Should we contribute to RRSPs or stick to Tax-Free Savings Accounts?” asks Lisa. “My parents want to give us a $20,000 gift when we’re ready to buy. That will help. Are we on track?”

 

Click here for the full MoneySense article.

 

The number of Canadians missing or defaulting on loan payments fell to pre-recession levels during the summer even though the amount of money owed continued to rise, according to a report from Equifax Canada.

 

Overall, non-mortgage debt loads continued to increase during the third quarter, up 1.8% from the same quarter of last year, the credit-monitoring firm said in its latest Quarterly Credit Trends Report released Tuesday. However, only 1.22% of debts were unpaid after 90 days or more in the July-September quarter.

 

That’s down sharply from 1.37% in the previous quarter and the lowest delinquency rate on record going back to early 2007, before the recession began.

 

“This ultimately is a good measure of how people are servicing their debt,” said Nadim Abdo, Vice President of Consulting Solutions at Equifax Canada. “Debt is increasing at a slower rate, the actual delinquencies are improving – they’re going down. That to me actually shows responsibility of some sort.”

 

Click here for more details from the Globe and Mail.

 

The wealth effect is a theory in behavioural economics that as one’s perception of their wealth increases, an accompanying increase in spending generally results. It’s one reason the US is trying so hard to prop up American home prices – falling real estate prices make people feel poorer and yields a negative wealth effect, causing spending to generally decline.

 

I often work with financially successful young clients who build a financial plan that looks quite rosy. Their incomes are high, their expenses are modest and retirement at age 50 looks quite probable. That said, the wealth effect tends to change their spending patterns, and therefore, their road to financial independence becomes steeper. Suddenly, an early retirement isn’t so likely. In practice, few people do retire when they’re 50 – the wealth effect is to blame.

 

The wealth effect is an important tool for governments and central banks, who can manipulate the perception of their citizens’ wealth to attempt to influence their spending. Higher interest rates make saving more rewarding and borrowing more intimidating. Likewise, lower rates, as we’ve seen in recent years, discourage saving and encourage borrowing and spending.

 

The wealth effect is pretty much hard-wired into us, a massive impediment to financial independence. The temptation to spend on stuff not only makes you less wealthy today, it makes you less wealthy in the future. The impact on today is quite clear – money that could have otherwise gone towards debt repayment or savings is immediately gone. But as your ongoing expenses rise, the amount of money you need to cover all of your future expenses and retire someday also rises.

 

Click here to read more in the Financial Post.

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