Canadians Surpass Americans in Net Worth, But Will it Last?

April 18, 2013, 2:30 PM

Canadians Surpass Americans in Net Worth, But Will it Last?

By Don Curren

They’ve been known to get pretty excited when a new, big-name discount retailer comes to town, but thanks to a booming housing sector, Canadians are more affluent than their American neighbors.

At least for the moment, that is.

Canada’s net worth was at a healthy 648% of gross domestic product in the final quarter of 2012, according to a report from independent economic research firm Capital Economics, which has gained something of a profile for its bearish views on Canada’s economy, and particularly its housing market.

By contrast, U.S. net worth was a more modest 550% in the same period.

The catch is that Canadians’ wealth advantage is built mostly on the big run-up in housing prices in recent years, and that’s a very shaky foundation, at least from Capital Economics’ point of view.The firm has been forecasting for some time now an overall reduction of 25% in Canadian house prices to bring the ratio of house prices to per-capita income back to historic norms. If that happens, Canadians may have to give up their bragging rights in the North American wealth sweepstakes.

Capital Economics’ report said the key explanation for the gap seems to be the downturn in the U.S. housing market, which has coincided with a boom in Canada’s.

“Before that, net worth in both countries had been extremely close for more than a decade,” it said.

Net housing wealth in the U.S. has slumped from a peak of 180% of GDP in 2006 to only slightly more than 100% of GDP now.

“In contrast, Canadian households’ net housing wealth has continued to trend higher and now stands at more than 130% of GDP,” Capital Economics said.

“The US experience is a very important reminder that asset values can fluctuate, whereas the value of debt is largely fixed,” it said.

Based on the ratio of house prices-to-per-capita incomes, U.S. housing is currently about 20% undervalued relative to its long-run average, while Canadian housing appears to be more than 30% overvalued, Capital Economics said.

“The upshot is that while Canada has the bragging rights for now, things could be very different in a few more years.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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