A fav topic here is risk. Childbirth is risk. Spending seven years at university is risk. Marriage is risk. Driving is risk. Borrowing is risk. Raising kids is risk. Yet people happily embrace such things, thanks to hormones and social pressure. Like kids buying houses, even without savings and virtually 100% debt. Society says that’s a good thing.
In contrast, a TD Ameritrade survey found when it comes to money, Millennials (especially) are insanely conservative. Almost 45% believe the best way to prepare for retirement is a…get this…savings account. Barely more than one in ten would go near the stock market.
Why are we growing children with the brains of 75-year-olds? Simple. Five years ago the kids saw stock markets temporarily fall, heard their parents moan about losing mutual funds, and learned bad things about ‘investing’. Then, for the last four years, real estate has romped higher on the back of cheap mortgages, lax lending and parental house lust.
Here’s the result: a HuffPost analysis has found that a quarter of Canadian cities are now unaffordable for average families when it comes to buying a home. Apparently this is news to these guys. Among those out-of-reach places are Markham, Mississauga, Burnaby and Surrey (as well as Toronto and Vancouver, of course). Four others – Calgary, Edmonton, Brampton and Victoria – are considered borderline.
How was this determined? Using a median household income of $87,000, current mortgage rates and 5% down, a family with no debts could borrow $460,000. So the Huffsters concluded anyplace with house prices averaging $100,000 more than this amount are beyond the means of normal people, a.k.a the middle class.
Of course, this is meaningless. That’s because most folks consider real estate to be riskless, and so find all kinds of ways around such financial barriers. A third of first-time buyers (40% in Toronto and Vancouver) expect gifts from their parents to throw at real estate. Banks are still financing 0% deals with cash-back mortgages. Developers will sell you a condo in return for your used car, or 2% down.
At the heart of this madness is financial illiteracy, which is all about how we perceive risk. Most people’s worst fear is losing money (80% of marriage breakdowns are financial). Because stock markets are revalued daily and the price of assets there can fluctuate a few percentage points every week, the Google generation can’t handle it. In a world brimming with job instability and flaky parents, it’s all too much.
Risk to them means any kind of loss, even transitory. Money is precious because they don’t have any. But debt is a romantic construct, entirely acceptable because it means you can get free stuff. Like a condo. In fact I think almost every young person buying real estate today with massive leverage never actually plans on paying it back. It’s cool to have debt roll through life, financing things you want, especially since (like their folks told them) houses always inflate!
The lessons yet to be learned: interest rates rise. Nothing goes up forever. Debts must be settled. Houses get illiquid. Life’s greatest risk is running out of money. And that’s why you never bet on just one thing, especially when everybody else is doing it.
Last year Canadian house prices increased, on average (says CREA), about 10%, on flat sales. The Canadian stock market gained 9.6%, the Dow advanced 30% and a balanced portfolio (no stocks, no mutual funds) grew about 11.5%. A 25-year-old who can find $100 a week to put into a TFSA, invest in assets like that and keep doing it until age 60 will have (at just 7% average return) $785,000.
And on that almost-eight hundred grand, there will be no tax. More importantly, there is no attached debt. There were no interest payments necessary to achieve it. No condo fees. No property tax. No land transfer changes and no commission.
If the hundred bucks weekly inhibits hipsters’ ability to buy a condo box or a saggy semi in a debauched but gentrifying hood, then they’re fools to take the plunge. Given that real estate markets are growing increasingly unaffordable even for people with average incomes, no debt and cash downpayments, it’s inevitable volatility and correction lie ahead.
But, as I said last week, I’m just one little whizz in the face of a hurricane. Each generation has to learn through its own mistakes, especially when the previous one lost its way.
Risk on, kids.