The cost of living in Canada has continued to increase amid growing unemployment, yet consumers haven’t stopped spending at retailers. Essential spending on groceries and personal care has remained steady, with much of Canada’s retail strength this year driven by discretionary spending on goods such as clothing and jewelry, as well as spending on experiences like dining out at restaurants.
Why?
Higher interest rates and affordability constraints are the culprit. Fewer people have been buying homes over the past few years, and consumer surveys increasingly show that Gen Z, the age cohort born between approximately 1997 and 2012, and the large Millennial demographic are increasingly giving up their aspirations for homeownership, and instead turning to luxury goods.
Labeled by sociologists as “doom spending,” the shifts in spending signal short-term positivity for this season’s holiday spending, but longer-term concerns for the economy.
Carl Gomez, CoStar Group Canada’s Chief Economist, said the economic link between housing unaffordability and increased discretionary or luxury spending is largely rooted in psychology.
“Young people are coming to terms with the fact that home ownership is out of reach for them. In the past housing was 3-4X income. Given where home prices were in the past, saving for a downpayment was a realistic goal to be done in your 20s and 30s. Then you could move on to a traditional life cycle – ie., have a family, take vacations, buy furniture etc. Today, home prices are 9-11X income,” he said.
“No matter how hard young people try to save for a downpayment, high house prices make that endeavour out of reach. As a result, many young people feel that the better trade off is to skip trying to save for a home and just spend their money on things that make them feel happy. Forget delayed gratification. The mantra now is “you only live once” – YOLO.
“So buying luxury goods, taking expensive trips are what more and more young people are focused on. Social media has only reinforced this behaviour. Wealthy boomer parents (with plenty of equity) are also helping to accommodate that. Another result of this is the breakdown of traditional families as young people stop marrying, having kids etc.”
Gomez said all age groups are doing some form of retail therapy.
“Economic anxiety may force all age groups to spend more than they would these days, However, young people are most vulnerable. Home ownership is further out of reach for this demographic group (average age of homeownership today is now in the 40s not the 20s). Job growth is also the weakest at this age group, while assets are fairly negligible,” he said.
“Social media tells them to spend to feel better and they do that without the safety net of personal financial security unless they have wealthy parents looking out for them. This is all reflected in elevated social anxieties/mental health challenges prevalent among this demographic group today.”
Gomez said Canada’s economy is sitting on very fragile ground.
“With the external side of the economy under pressure to restructure due to the US trade war, domestic demand needs to hold up economic growth. It’s been doing that over the past year, thanks to significant immigration, largely of young people and solid consumer spending,” he said.
“Now that immigration has been curbed and without real income growth generated through productivity, that spending cannot continue indefinitely without fueling more household consumer debt. With government’s fueling debt growth now too, doom spending may only lead to a doom loop, ever increasing debt, higher rates on debt, printing money to support falling asset prices but increasing inflation and the cost of living.”
Gomez said more economic anxiety, more consumers are prone to things like retail therapy, doom spending and rising debt.
“This is even a reality in the US, where the economy is on firmer ground than in Canada.
“Savings rates are still elevated versus recent trends. Will be watching to see if there is erosion in this should real income growth fail to materialize. What we should all be watching in Canada is whether businesses start to make the key investments to drive up currently sagging productivity growth to help raise real income levels.
“I suspect this will happen at more glacial levels than immediate. In the meantime, the wealth divide across generations could only grow wider. Baby boomers with considerable equity and assets, will benefit, and may pass along some of this wealth to their children to give them a “head start”. But for others, their ability to grow their standard of living and acquire wealth may remain challenged. Watching indicators of the wealth divide would be a key one to watch in that regard.”
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