A few words for the children. Your parents have been lying to you. Best get over that now.
Boomers are the worst collective source of information on the planet. Don’t listen to them. They were formed in another time and are loopy enough to believe the past will repeat. It’s why they want you to be exactly like them and, sadly, why so many Gen Xers (or Millennials or whatever they’re called) are rapidly turning into their parents. Big mistake.
The wrinklies grew up in a time of inflation and sustained economic growth. Today we’re closer to systemic deflation and a flatlining economy. It’s no fluke interest rates have been in the ditch for six years because without that artificial stimulus we’d have a jobs crisis and falling incomes. As it is, youth unemployment’s 14% and wage growth trails the cost of living.
Inflation and expansion for the Boomers made making money easy. Buy a house, make minimal mortgage payments, and wait. Every year salaries rose, real estate plumped and debt got easier to pay. Of course, that all ended circa 1989 when rates jumped and houses crashed – but most Boomers think nothing of consequence has happened since then, anyway.
Your parents went to university and it paid off. Tuition was cheap and a degree was gold. A cult of higher education was born, and it became de rigeur for every Boomer baby to head off to college. So now everybody has a degree, and it means diddly. But that piece of paper cost a ton of money, so student debt is off the chart.
Big debt. Few jobs. See where this is headed?
Worse, lots of education and a delayed adulthood don’t equate to more income. According to Stats Canada university grads have made almost no ground over the past decade and a half. For example, the average guy with a BA living in BC earns 39 cents an hour more than a grad did in 2000. Women with a degree make 67 cents more (but still earn lss than $20 an hour).
During the same period, thanks in large part to their parents, house prices have doubled in most places. So what are the wrinklies doing to ensure their children turn into them? Surveys now show at least 40% of the kids expect the Bank of Mom to help them with a real estate down payment. And this march into condo indenture is being assisted by the banks (plus CMHC), who are happy to loan money to people with none of their own, unstable employment, diluted degrees, student debt and little or no credit history.
Of course this is being encouraged by the Boomers at a time when real estate has never cost more and rates have never been lower. So what lessons are being taught when you push your kid to buy an inflated asset with extreme leverage and no skin in the game? That they’re entitled? Or special? Or that real estate always goes up, because it did for you?
As I mentioned yesterday, you can buy the average condo in Toronto with 5% down and $2,465 a month in carrying costs plus $380,000 in debt. Or you can rent it for $1,600. No debt. Leasing spares you from borrowing a dime while giving freedom and mobility to chase elusive jobs in a tight marketplace. It eliminates the substantial risk that even a small real estate correction would wipe out all equity and put you underwater on the mortgage. And it lets you start building a portfolio of liquid assets – essential in a world which could drift inexorably closer to deflation and swampiness in the years ahead.
So, moist virginals, just stop listening to your elders and don’t take their down payment cash (it’s all a plot to keep you from changing cities, anyway). This is not the Seventies or the Eighties. The last thing you should want right now is a boatload of debt at rates destined to rise, which is tied at a property you might be selling at a loss. What helped your hippie parents build wealth in years of double-digit inflation could cream you in the no-growth decade ahead.
They had Jefferson Airplane. You’ve got the TFSA. No comparison.