Too much love

Some days ago, bleeding-heart helicopter parents accused me of insufferable insouciance over throwing grown children out of the house. They should, I said, launch. Strikes me no healthy adult in their twenties deserves suckling, or that sheltering your offspring from financial reality is useful. In fact, it could breed a self-absorbed social monster who thinks they should go from mom’s house to their own house – but with nicer counter tops.

Of course, I was pilloried for this. There are way more cloying parents than I thought possible. Scads of them think they’re doing kids some kind of favour by shielding them from rent, transitional poverty, budgeting, failure, want and the qualities this engenders. Like self-reliance, ingenuity and confidence. Not to mention smarts.

In fact I fear for the new army of basement-dwelling, under-employed, higher-educated, coddled children who are waiting for those $90,000 jobs and sexy downtown condos. When they finally stagger out on their own, they may find that momsy just squished half a dozen of the best years of their lives.

But whadda I know? I moved out at 18, married at 20 and built a house at 23 with a 12% mortgage. In between, my bride and I lived with bugs, ate KD and learned how to get by on nothing. It was filled with desire for something better, and gave us a base line of expectations for life.

But this post is not about idiot parents and their entitlement brats. I’m far too sensitive and empathetic to delve into such things. Instead it’s about financial illiteracy, now an epidemic. Especially among the brats.

I mentioned my first mortgage was 12%. After that we felt blessed to buy other properties and get a little less than 10%. Thank god we didn’t  have to renew when they spiked north of 20%, and even when we bought a house in Ottawa after I was elected in the late Eighties, the loan was at 14%.

Over the course of the last 20 years the average five-year mortgage has been 8.2% – a fact which helped keep mortgage debt under control, since borrowing cost so damn much. That, in turn, kept real estate more or less affordable – provided you could cough up a down payment equal to a fifth of what you were paying.

As you know, mortgages are now 3% or less. Mortgage debt has soared to $1 trillion and the average family in Toronto, Calgary or Vancouver can hardly afford the average home, even at 3%. That’s because over-borrowing allowed over-spending, so real estate values have soared even when incomes did not.

In other words, there’s a straight-line connection between cheap money and expensive houses. Most new buyers in the last five years cannot even dream of paying off their loans. Worse, it seems a startling number think 3% mortgages and normal and will last forever.

So, Manulife threw out some numbers this week. About 35% of people between the ages of 30 and 39 (you’d think they would know better) believe today’s rates “are average or relatively high.” In this group, half said they’d be free of debt by age 50. But in the same survey, 80% of people between 50 and 60 said they were indebted.

What does this mean?

Simple. Young borrowers probably have no idea how easy it is to borrow and how hard to repay. Many have been lulled into thinking of debt as just a tool to get what they’re entitled to – like a house. They lack the financial literacy to understand real estate has never cost more, and money’s never been so cheap. Or to expect that both will revert to the mean – over time houses will fall and rates will rise.

It could mean there are tens, or hundreds, of thousands of people who will find it impossible to service their debts if rates normalize (and they will).

Most significantly, it means kids hopped up preapprovals, waging bidding wars like they were video games, driving valuations higher just because some irresponsible banker game them a pile of it (plus a cash-back bribe) have helped render housing unaffordable. For everyone. And the trip back down will be painful.

The last major real estate correction in Canada’s largest market occurred in 1990. Prices plunged after hitting an historic high. Today’s 30-year-old was nine. If he missed reading the financial pages for a few days, I guess I can excuse that. But his parents were living through it, coping, learning from their mistakes.

The greatest parental gift is not a cloister, but knowledge. And a timely boot in the ass.