Joanna is 34. Says she’s happy she found us.
“Just wanted to compliment you on the great blog. I have always felt a bit behind, financially, because I graduated into a not so great job market. And I do feel pressure to buy a house or condo or something. But my partner and I have both come to realize that the whole ‘buy a house or else you are a loser!’ thing is pretty much the financial decision of drinking the kool aid. We both have family members who have more house than they can afford, and they are slaves to it. They are constantly preoccupied by money, can’t go out, can’t enjoy life. And us poor renters? We’re making half what my lawyer brother makes, but we’re putting 10% of take-home into an RRSP and a vacation fund and we can go to restaurants or movies or whatever pretty much whenever we want to. Is life so bad? Would ‘owning property’ and ‘building equity’ really make things better for us? I don’t think they would. I think that if we did own property, we would not have the money for the RRSP and the savings and the restaurants. That monthly saving is my slush fund so that in the next few years I can go on maternity leave and have a baby. I would rather have the baby than the house.”
Not a day passes on this pathetic blog that the warfare between Boomers and their kids (and kids’ kids) isn’t in full flower. No wonder. Boomers sprouted in a time of economic expansion, inflation and the rapid escalation of asset values. All they needed to do (they thought) was buy a house and spend the rest on jeans, Chianti and Volvos.
As one of the juvenile blog dogs put it so eloquently: “The baby boomers got all their wealth just by sitting in their living room. . . The only way my f***king generation can ever hope to afford a home is unless we all become CVEO’s of the fricken company. Where’s the incentive to work? I’m a slave to baby boomers.”
But that’s now hit a wall. This is the age of deleveraging, when more wealth goes into paying down debt than expanding the economy. Companies got efficient and profitable by cleaning up their balance sheets and trashing workers. That means investors (usually half-dead old people) get the benefit while workers (mostly their children) get laid off, dead-ended and downsized. And no economic expansion means no asset inflation. Houses won’t continue to escalate in price, no matter where mortgage rates sit.
Meanwhile those poor Gen Xers have been suckered into real estate horniness at about the worst time in a half century. Buying now, with prices extreme, brings the greatest inter-generational transfers of wealth. But in the wrong direction. From the young to the old. I’d be pissed, too.
However, the tables will be turning. Keep your pants on.
Thirty-two per cent of the Canadian population is made up of Boomers. Every day a little more than 1,000 of them turn 65. Almost as many retire. Daily. Seven of every ten have no corporate pensions and we know the average 55-year-old’s RSP has enough in it to last about ten years. At the same time circumstantial information suggests most of them have investments in mutual funds, which means their fund salesguys have made more money than them. And 80% of all TFSA funds in Canada are rotting in savings accounts and GICs. In short, an astonishing number of these people (and there are 9,000,000 Boomers in Canada) will be running out of income decades before they run out of life.
What about government pensions, you ask? The median CPP payment is $537 a month and OAS averages $507. That’s $12,000 a year. Tell me how far that goes with gas at $1.39 a litre (my fill-up this morning). As I’ve said before, it’s impossible to maintain a house in any major city, living on the public dole. Those pensions were only ever meant to replace one third of retirement income, and yet millions of financially brain-dead Boomers are steaming into their adult diaper years still thinking as long as they have a house, a pulse and a vial, they’ll be fine.
There’s only one conclusion. Lots of people will have little option but to sell their houses so they can downsize or rent and invest the difference for income. After all, energy costs and property taxes alone could probably lease a fine condo. Why suffer?
As far as I can tell, there could be about 2.6 million Boomer houses coming on to the market over the next 15 years. So just imagine what that’s going to do for property values, happening (as it will) as interest rates normalize to levels which will make a 2.99 Special look like mortgage porn.
Not hard to see where this is heading, is it?
If you’re a Boomer, don’t wait until the market is glutted with suburban McMansions. Sell that sucker now, especially if you’re in one of those markets with low inventory and a supply of fools. But if you’re a house-horny young person, zip it. Not the time to jump in. Sales erosion will soon become price reductions, and by this time next year not only will mortgages cost more, but another 300,000 wrinkly ex-hippies will be wondering why their financial security left with their hormones.
So you can get a fat mortgage, buy a house and finance a Boomer with an adulthood of debt paying off something which will cost less soon. Or not.
Gee. That was hard.