“Many millenials are getting frustrated by how long it now takes to ‘get started’ in life,” Kirsten writes me. “In WWII, a young man of 16 was considered an adult, and able to find work/help support the ginormous brood his mother had given birth to. Student debt was unheard of, a car cost less than one year’s wages, and a house would cost you all of your savings. Now, we are almost considered children until sometime after we graduate university, we are graduating with debt, and buying a house will likely cost us mortgage payments for 15+years.”
Without a doubt, there’s a meme today we’re in uncharted times. Maybe we are. After all, in the 1940s 16-year-olds were enlisting. By the mid-Forties 37,000 Canadians, most of them kids, had perished. So, life was a bitch then, too, Kirsten. And nobody could tweet about it.
But while the Millennials whine, lots of Boomers gloat. Like Paul Etherington, the current prez of the world’s biggest real estate board, in Toronto. He wrote a piece for the mainstream media this past weekend – as a trusted real estate leader – telling people like Kirsten the longer they dither over buying a condo, the more impoverished their lives will be.
Are houses now averaging $550,700 overvalued, he asks? Dig this response:
“It’s easy to see how much of a strong long-term investment real estate represents by taking a look back at our city’s history. Looking back 18 years, to July 1996, the average price was $199,856, reflecting an increase of 175%… it does illustrate an indisputable truth: a sensible investment in housing provides strong long-term returns.
“Reaching even farther back, 48 years, to 1966, the average price for a new home was $22,500. Today, a parking space in a downtown condominium can easily sell for more than the cost of a home in 1966… A Toronto home purchased 78 years ago, in 1936, could have been snapped up for approximately $8,000.”
See what I mean? The young feel bitter and disenfranchised they can’t have what they think their parents had at their age. Meanwhile the old farts just want everyone to be like them. So, buy the damn house, kid.
Let’s give some context to Mr. Etherington’s blatherings.
In 1936 there was a depression. The jobless rate hit 30% in 1933, there was no unemployment insurance and the feds operated relief camps for idle men. The average annual wage for a two-income household (which was rare) was $1,473, and the average Toronto house cost $8,000. In other words, it took 5.4 times annual income to buy – which by all measures was extremely unaffordable. The prime rate was 5.21% (almost double that of today), and mortgages were in the 7% range. And Paul Etherington says Toronto houses could be ‘snapped up.’
In 1966 the average income for men was $5,483 and for women $3,016. So a working couple making $8,499 was considered middle class and could buy a house priced at $22,500 with just 2.6 times annual income. In other words, affordability had soared with wages rising as the economy boomed. Real estate price increases were kept down, in part, by the average mortgage rate of 7.6%.
Thirty years later, in 1996, male incomes averaged $32,588 and for women it was $21,735. So with two incomes a couple pulled in $54,323, which made it fairly easy to buy a house costing $199,856. The multiple then sat at a reasonable 3.6 times family earnings. Mortgage rates were pretty consistent as well – pegged at 7.2% that year.
Today the typical Toronto family brings home $98,116, while average house prices in the Toronto area have soared to $538,530, in large part because 3% mortgages make debt easy to carry. But compared to incomes, real estate is just as unaffordable as it was in 1936 – at 5.5 times household income.
So what are the lessons?
- History tells us houses are seriously too expensive. Most Boomers have no idea how much easier it was to score real estate three or four decades ago, or how low rates today are masking the idiocy of buying at these levels.
- Clearly there’s a negative correlation between rates and prices. Low rates bring high prices. Ironically, interest rates are down today because the economy’s weak, keeping wages suppressed. The worst of two economic realities.
- Today’s rates are probably an anomaly, the work of massively interventionist central banks. They will eventually revert to historic levels. In 1936, 1966 and 1996, that was 7% for a five-year loan – more than double current levels. Imagine what that will bring.
- Therefore worry more about debt levels than ever-rising house values. They will be falling in the future. Wait.
- Realtors like Paul Etherington, placed in a position of public trust and influence, are an embarrassment. Worse, they lead people into bad decisions with crayon economics and McFacts. To be kind, it results from ignorance. More likely, it’s greed. Unknown to this industry is the concept of duty of care. Leaders care for those who depend upon them for advice and knowledge. Predators do not.
My advice to Kirsten. Stay cynical, kid.