Relax, already

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Boomers are so entitled.

“When the boomers started working, they enjoyed good starting wages and generous retirement benefits — thanks to strong labour unions. As they moved up the income ladder and as some of them took over positions in government, they gave themselves huge tax cuts, greatly weakened the strength of labour unions, and put in place plenty of other perks that they disproportionately benefited from — like income splitting and TFSAs. In a report from earlier this year, the parliamentary budget officer concluded that TFSAs overwhelmingly benefit older, wealthier Canadians. Did I mention the TFSA was first proposed by one of Canada’s most prolific millennial-mocking boomers, Garth Turner?”

Me a Millennial-mocker? Just for calling ’em moist and misguided? For the record, I also think Boomers are hilarious, listening to The Eagles while they drive to Shoppers for a bag of thirsty underwear. But it seems the re-writing of history – as exemplified by the Vancouver Housing Blog quoted above – is getting out of hand.

“When it comes to housing, boomers were able to buy a single-family home on one income. Then they got to enjoy decades of falling mortgage rates, giving them a nice bonus every time they renewed their mortgage. The outlook for millennials is much less rosy. As hard as it is now to buy a place, it’s likely to get much worse when they renew as interest rates have nowhere to go but up.”

Actually while the Boomers were moving through the real estate cycle, interest rates were at levels that would be considered fictional today. I remember renewing a mortgage at 14% in 1990, and thinking how fortunate I was they weren’t 18% any more. Ah well, every generation believes they live in the worst of times and loves to feel victimized. What most people fail to understand is that houses have become unaffordable, and society so lop-sided financially, because money is too cheap.

Wacko monetary policy, in place for the past eight years, has ruined a lot of things. It’s basically destroyed saving, with risk-free assets like savings accounts and GICs paying less than inflation. It’s created an historic bulge in debt at all levels, from governments to families. After all, when a five-year mortgage is 2.4% and inflation is 2.1%, isn’t that like free money? Cheap loans therefore lead to price inflation, since debt service costs are in the ditch. And nowhere is that more in evidence than with the real estate market, as average SFD prices in major cities drift steadily past the seven-figure mark.

So unlike 1990, when my mortgage was 14% on a beautiful property I bought in Ottawa for $319,000, home loan rates are in the 2% range and that same place is selling for almost $800,000. This is no Boomer thing, of course. It’s a function of central bank policy, and every day it remains in place, the world gets a little more screwed-up. The Canadian savings rate has toppled. Real estate values are insane. Debt numbers are off the chart. And now 55% of people (in last week’s BDO survey) say they’d start missing monthly payments if rates were to increase. At all.

As this blog has been yammering on about, this will soon change. US rates will rise for the second time in a decade in June or July, for the third time in the autumn, and for the fourth, fifth and sixth time next year. Five-year fixed mortgages will no longer be in the 2% range and Toronto houses will stop appreciating 15% a year. People taking out mortgages today will renew them at double the rate – a fact of life the bankers are not even stress-testing for.

The Bank of Canada will (of course) follow suit, lest the dollar take more hits, inflation spikes and the destructive asset bubbles continue to inflate. Anyone who believes rates will stay where they are is self-deluding. It won’t be quick, but it will be relentless. And this is the time to prepare.

So, it looks like financial assets have a lot more upside these days than residential real estate. When Millennials can’t afford houses with current loan rates, how can they buy them if rates rise? They can’t. It’s suicide. That’s why prices will fall. It’s also why housing poses such risk, especially in places where demand is greatest, and the Boomer-bashing rhetoric most acute. But the M-gen can certainly take the cash they save renting and plunk it into a TFSA. This blog has already given you the portfolio formula – balanced and diversified, liquid and tax-free. Way less heartache ahead.

Warren gets it.

“I am a 29 year old University educated male living in Vancouver. I am recently married, rent my housing, don’t own a car, and couldn’t be happier. I was inspired to write by your last few posts. Since graduating from our undergrad degrees six years ago, we maxed out our TFSAs and RRSPs and have amassed a liquid net worth of almost a quarter million dollars.

“To me it’s all about focusing on what you can control and who you associate yourself with. Many of your readers complain about social comparison and how they feel next to their home ‘owning’ friends and family. Many of our friends ‘own’ homes but they couldn’t care less if we do. Why should it matter to them if we send our money to a landlord or the bank on the first of the month?

“Our rent is by far our largest monthly expense but I pay it with glee! Crunching the numbers – accounting for condo fees, taxes, and maintenance – our Price to Rent ratio is 54! We live in a new building in a trendy neighbourhood with amazing views of the north shore mountains and downtown. What a benevolent deity our landlord is!

“I hope my story reinforces that not all us millennials are as moist as you seem to think. Some of us heed the sage advice of those who came before us and tune out the hysteria that is the Canadian real estate market. There is a lot to be thankful and happy about living in this country as long as you only focus on what you can control.”

There may be hope yet. And I still love my TFSA, dammit.

One idiot

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In a moment, a small but poignant example of the troubles we face. First, the latest reason why said pooching will occur.

The only banker in the world who actually matters, feisty little Janet Yellen, on Friday confirmed we’ve come to the end of cheap money. Two more rate increases from the Fed this year, the next one…soon. “It’s appropriate — and I’ve said this in the past — for the Fed to gradually and cautiously increase our overnight interest rate over time,” she said at Harvard. “Probably in the coming months such a move would be appropriate.”

That means the Fed boss is in agreement with her colleagues who have been busy tell reporters (and markets) to expect multiple hikes this year, next year, and beyond. The next one will occur on June 15th or July 27th. And here are the odds, following her words today:

FED CHART

So, it’ll happen, as this blog told you would be the case. No, moist Millennials, rates are not going to stay where they are for decades. And neither will house prices. What you do about it therefore seems quite clear: (a) lock in the five-year mortgage at 2.49% (or better) if you need to keep the house and expect to renew at double that rate (or better), (b) sell at this peak level and look like an omniscient friggin’ genius in two years, or (c) take a cold shower with your dog if you even think about buying right now.

This brings me to Sandy. She emailed yesterday. The exchange was short. Here it is.

Hi Garth. So my question is; what if you don’t have a lot of money to save, after rent payments. Would it not be better to be making those rent payments turn into mortgage payments? That way at least you are investing in SOMETHING, rather than nothing. By the way, we live in Toronto, where obviously both rent and mortgages are crazy. Thanks Garth.

Garth: How do you buy a house without money?

Well we have about 40,000 saved at this point. And we cannot afford a house so it would be a condo or townhouse.

Garth: What is your income? Your current rent? Family makeup? Savings rate? Ages? Jobs?

My husband and I are 34, and we have an almost two year old. Our combined incomes are 145,000. I am a social worker and he is a program manager at a not for profit. Our child is in daycare for another two years at about 1000 a month. After everything each month we put away about 300-400 in savings. Right now we pay 1800.00 a month in rent. I’m afraid to keep waiting to buy – it’s been years now and everything just keeps going up. I definitely feel we’ve missed the boat as our friends places have appreciated like crazy during this time.

Sigh. It’s hopeless. Two people, mid-thirties, minimal savings, professional jobs, university educated, with a kid – and clueless. They suffer from FOMO, sautéed with envy at leveraged friends who have what they do not. On an income of $145,000 they save a piteous three hundred bucks a month despite living costs of just $1,800. If they found a cheap 416 townhouse for only $650,000 and put 5% down, their savings would vanish and their monthly (mortgage, insurance & property tax) soar to $3,500. In other words, screwed. Impossible. With a child to look after, irresponsible. And yet Sandy moans like she’s a victim – missing out on an entitlement. “I’m afraid to keep waiting to buy…”

This is what real estate is doing to this place. It’s toxic. And every day that passes now, we’re a sleep closer to the resolution. Check back occasionally, and I’ll give you a date.

Well, let’s not end the week emotionally hooped. There are some people reading this blog who actually seem normal. Randy (in Calgary) has decided to join FIRECracker’s screw-the-house Millennial Revolution (last weekend’s event here) while Suzy in Van has some intelligence from the most expensive neighbourhood on the planet.

If you own a house, try not to worry this weekend. Seriously. You can always grow cauliflower.

Hi Garth, love the blog and read it almost daily. I rent a comfortable 2 bed/2 bath 1,400 sq ft. condo with numerous amenities, located in downtown Calgary.  When I signed my lease for $1,500 per month, I also had the option of purchasing the same unit for $275,000.  Had I purchased, the condo fees would have been approximately $950 per month and property taxes roughly $150 per month. My calculations put the price to rent ratio of this condo at 57,  before considering any additional costs of ownership beyond condo fees and property taxes. I have a roommate paying $750 per month on a month to month sub-lease for the extra bedroom, rent out the parking space for $275, and my girlfriend chips in $400 per month (plus she’s a great cook).  Yes, I pay $75 per month in rent living in a large, relatively upscale condo just a 10 minute walk from work. My annual income is modest ( just a little under six figures), but I max out my TFSA and RRSP every year, which has resulted in an overall tax rate of under 20% of my income over the first decade of my career. Roughly 60% of my income has gone into investments (mostly ETFs), while I live very comfortably on the other 20%, as a happy renter. The video you posted earlier this week about the millennial revolution sounded a lot like my story, as I’m approaching having full financial freedom. You are an inspiration and a bit of a contrarian in a sea of conformists, thank-you for your insightful blog!

Hey Garth – I live in Vancouver’s west side close to point grey and I’ve been noticing that properties aren’t selling quite as fast as they were a couple of months ago. I saw a commenter on one of your posts also mention this and I think they are right. For example one house was listed for over two months and just got taken off the market and also this house for example (see below) has been for sale for almost 3 months and just yesterday the agent changed (not doing her job?). I’ve noticed the same thing on my way home from work a lot for sale for over 2 months. Also a funny story – a friends neighbour sold their house for 500k over asking – everyone was shocked. The agent let it slip that while there were multiple offers all were low except for one. Same thing with a family friends house that just sold over asking. One offer below asking and one offer above but all people see it sold over asking. So all it takes is one idiot. Could this mean we have reached the top? Love, Suz.