A new report by Scotiabank Group says that gains in real estate equity have driven Canadian household net worth to an average of $136,500 per capita. The value of real estate assets has gone up by 27 per cent during the last three years, more than double the 13 per cent increase in household financial assets, the report says.

Written by economist Adrienne Warren, the report says, "From a balance sheet perspective, real estate assets are, on average, not highly leveraged. In fact, homeowner equity has been steadily rising in Canada since mid-1997, with the 6.5 per cent average annual advance in the value of household real estate assets outpacing the five per cent yearly increase in mortgage obligations."

While home equity has always been the single largest component of net wealth for most households, the report says, its share of the household portfolio has increased in recent years. Real estate assets accounted for 34 per cent of total household assets in the second quarter of 2004, up from 29 per cent four years ago. Non-pension finance asset holdings have dropped from 41 per cent to 37 per cent of total assets, while pensions and life insurance remain steady at about 20 per cent.

"Disappointing equity returns since the bursting of the stock market bubble in the late 1990s, combined with low nominal returns on interest-bearing assets, have reduced the attractiveness of many financial investments," says Warren in the report.

Historically low interest rates have been driving the real estate market for several years, and "appreciating home values, supported by renovations, quality improvements and square footage expansion, have also raised the value of housing stock."

The 2004 Canadian Housing Observer, recently issued by Canada Mortgage and Housing Corp. (CMHC), shows the impact that low rates have had on affordability. "A borrower who would have qualified for a five-year mortgage of $100,000 in 2000, at the posted rate of 8.35 per cent, would have been able to quality for an additional $18,472 in mortgage financing in 2003, at the posted rate of 6.39 per cent, for a total mortgage amount of $118,472," says the CMHC document. More first-time buyers have been able to enter the market because of the favourable rates, and rising prices have also encouraged move-up buying.

Stiff competition among financial institutions has also helped drive down the cost of borrowing.

The Scotia Group report says mortgage servicing burdens are at a historically low level. Mortgage interest payments were 4.7 per cent of personal disposable income in the second quarter of this year, compared to the long-term average of 5.4 per cent. "While interest rates are expected to drift higher over the coming year, the impact on household finances will take time to materialize," says the report. "Many mortgage holders are locked in at low rates, and variable-rate mortgages tend to cap debt-service payments by mainly affecting principal repayments."

The report also notes that Canadian homeowners may be in better shape to handle interest rate increases than our neighbours to the south. It says real estate holdings represent a smaller share of U.S. household assets than in Canada, at 28 per cent. The proportion of homeowner equity held by American households is also lower than in Canada, at just 55 per cent of real estate assets, compared to 70 per cent in Canada. That's because mortgage obligations have risen faster than underlying asset values.

"The relatively faster pace of mortgage borrowing by U.S. households reflects different debt paydown approaches, as well as the deductibility of U.S. mortgage interest payments. U.S. households have focused more on paying down higher-cost consumer debt, in part through mortgage refinancing or home equity extraction. Yet American homeowners are likely more exposed to a significant rise in interest rates than in Canada, as overall debt servicing burdens have not improved in recent years," Warren says.

The impact of rising real estate wealth in Canada is significant for the overall economy because it drives consumer spending on big-ticket items such as appliances and furniture, and it spurs home renovation activity, the report says.

"Gains in real estate wealth typically have a more powerful impact on consumer spending than do equity gains, as they are perceived as more permanent, and real estate is more widely held."