Screwed

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What a drag it must be being a millennial. When the GFC rattled the world, you were in college. When the dot-com bubble exploded, you were in high school. When the last serious recession hit, you were in Huggies. When financial apocalypse erupted 27 years ago Sunday, you were an urge.

So how can we expect you to have any real context for all of this angst? Suddenly a lousy job market and temporarily inflated house prices have created a crisis that makes WW2 look inconsequential. Worse, it’s all a seething conspiracy.

Well, that’s the way they’re feeling at The Tyee these days, an online journal for the youthful, oppressed underclass that, astonishingly, uses the word ‘screwed’ more often than this pathetic blog. Days ago, readers lapped this up:

“Vancouver has morphed into a machine for screwing millennials.

“Unless we do something drastic, we will have deprived that generation of productive 20- to 35-year-olds the ability to own a house in Vancouver. If you think that’s no big deal, consider this: each person shut out of affordable home ownership in Vancouver is consigned to the screwed side of the increasingly widening global wealth divide.

“That’s right. Vancouver’s perverse real estate market is a textbook example of the suddenly fashionable realization that the rich are getting way richer at the expense of an evaporating middle class.”

Now, there is some logic to lamenting the middle class. The demise of the middle is obviously happening, a phenom best illustrated by American society, where just 1% of the people control 37% of the wealth, and the average family has saved only $25,000 for retirement (or anything else). But there’s one overriding reason for this. Real estate. American families bet big on housing, and they lost spectacularly. It’s estimated that $6 trillion was wiped away when real estate values collapsed an average of 32% – and most of that slipped through the fingers of middle class households.

Ironically, while American millennials have seriously backed away from home ownership, Canadian puppies can’t get enough of it – and feel, yes, screwed when a person in their twenties is denied a house. Simply because they can’t afford it. How awesomely unfair is that?

Despite watching the meltdown south of the border (if any of these whiny kids were paying attention), plus the way real estate has decimated wealth in many European countries, along with deflationary threats and the risk of borrowing a mountain of mortgage money, they’re still horny. Can’t help it. They see houses as wealth. Evidence be damned.

So, society is “depriving” millennials of real estate ownership thereby pushing them into the screwed side of the wealth divide. It sounds like a human rights violation, and the push is on to find solutions – like (as the Tyee author suggests) carving up existing houses into micro-units that the kids can afford. I think we used to call those  “apartments.”

But here’s the deal. Somebody with credibility (and that’s not a Boomer blogger with a titanium leg and penchant for Harleys and Amazons) needs to keep a generation of horny millennials from self-destruction. Just this week another alarm was raised. Giant ratings agency Moody’s affirmed Canada’s good credit standing, but said our housing is “particularly inflated” and the ever-increasing debt load of the middle class is a risk that cannot be ignored.

“This combination presents a potential risk to the banks and to the federal government directly, as it guarantees a considerable portion of mortgages,” said the report – as Moody’s joins fellow rating company Fitch, plus Morningstar, The Economist, the IMF, the World Bank and other international observers who think we’ve flipped. And now that oil prices have fallen, imperiling one of the country’s major export industries, while the dollar has tanked, how can young people think housing is safe? Why would they want the debt, potential illiquidity and likely losses?

Simple. They don’t believe it. The generation these kids hate and blame did an excellent job in brainwashing their offspring. Nick Nanos knows that.

The pollster’s latest Canadian numbers are precious:

  • Those who believe the economy is getting worse: 83.7%
  • Those who do not feel better off financially: 80.2%
  • Those who believe real estate prices will rise: 40.3%.
  • Those who think house prices will decline: 10.6%.

How do you are argue with that? You don’t, of course. Because when most people think something, it just has to be so. Today the majority of us, including our educated-to-the-gills young people, fail to make the connection between the stuttering economy and the one asset that depends on economic expansion more than any other. Without more income and more jobs, housing is doomed. No matter how cheap mortgage rates get.

Seems obvious to me. But I spent my youth growing hair.

What could go wrong? (2)

WRONG

“I have a car-buying company,” says Paul. “Lately I have seen a strange phenomenon. Most of our customers are trying to sell their vehicles to pay their household debt. The problem is that 70-80% of their vehicles have loans. Too much debt!!!! I feel sorry but we cannot help them.”

While a lot of people who come to waste their time reading this pathetic blog have high net worth and the income of potentates (as opposed to potatoes), debt is a massive national problem. It could bring us all down, especially if deflation has legs.

For example, look at what the kids are doing. Since Boomer parents messed so much with their heads, young people continue to think that buying real estate they can’t afford and shouldering massive, low-rate debt, is what adults do. Sad, but pervasive. Here’s an example from this past weekend.

Casey sounds like a smart 23-year-old, working in IT for an outfit he likes. He sent me this:

“My newlywed wife and I live in Victoria BC and are looking to take the next step at building our future. We are currently renting, paying $1200 per month on a decently sized two bedroom, one bathroom apartment. We don’t hate the place, but we have found a condo we like and think we can afford. The builders have yet to break ground on the project and estimate 2.5 years to completion. The place we are interested in is about $450,000 with $340/mo in strata fees. My question to you is, is this a smart decision? Do you predict that our home will be worth the same value or more when it comes time to close? Is it smart to lock into a builder rate of 4.99% now in case interest rates shoot up between now and closing? We are hoping to be approved for 5% at signing and then take the 2.5 years to build up enough of a down payment to avoid CMHC costs at closing.

“I was all gung ho to go out and sign the papers when I woke up this morning, but since talking to a co-worker today and reading your blog thanks to his recommendation, I clearly haven’t thought things through enough. I need you to help explain how we can assess Canada’s economy and the predictions of the big-D.”

So I wrote back, to learn more. When I asked Casey what assets he and his babe have to contemplate buying a $450,000 unbuilt condo, and what their financial position will be afterward, this was his reply:

“Great to hear back from you. The only assets we have now are a car with a payment of $500/mo. Because this is a new development, and we expect to get approved for the initial 5% signing down payment instead of the 15% signing DP over 9 months, we can currently afford to pay the 5%. My wife and I both earn about $65k each. She is trying to get another casual position so she can pull in a bit more than that. And currently we have no plans to start a family.”

There you go. A typical situation these days – young adults who figure they can go from zero to a half-million-dollar home in one step. How should I respond?

Obviously I could remind Casey and his new wife they’re gambling and speculating in buying a housing unit which is unbuilt, unknown and with a contract which typically gives the builder all the cards – the right to delay closing, to change floor plans and materials, or even not to build if pre-sales sputter. They should know that over the course of two or three years everything could change. Rates could rise. The economy sink. Pandemic hit. Markets fall.

The kids need to be reminded we’re in the final throes of boom housing market that cannot last, which means they’re probably buying at the top. Or that Victoria already (like most major cities) has too many condos coming to market, in buildings hastily and cheaply-built whose future problems will be manifest in special assessments and illiquidity.

I could ask them why they’d trade being young, free and mobile with a shiny new life ahead, for debt, obligation and financial servitude – and still not have a back yard, if babies arrive. Or simply, I could remind Casey and wife that by buying they will likely double their living costs (to about $2,500) compared with their current rent. If the new condo doesn’t appreciate every single year they own it, this will be a money pit tainting the rest of their lives. Why would anyone want to start a marriage that way?

This is what easy debt does. For that we must blame gutless policy-makers, omnivorous bankers and misguided helo parents. Household credit – loan and mortgages – are on the rise again, swelling at twice the pace of income growth. And while seeping deflation now suggests interest rate increases will come slowly, we have a greater threat to ponder – economic torpor. Without steady job growth, expanding GDP and higher family incomes, this giant pile of debt is a giant threat. If Casey & his squeeze buy this place, their consumer spending will go to zero, and their savings along with it.

Kids without assets ready to buy a half-million-dollar apartment? I shouldn’t even have to write about this.