Gen wars

A moister meme is that every gen which came before had it easier. Especially with real estate. You might have noticed in the last day or so comments like this back in the steerage section:

Two generations ago people with no college degree, stay at home spouse could have 3 kids, afford a house and run the kids through university.
Now 2 working sheep could not get a condo, god forbid kids.

And there were even some attempts to validate the feeling that never before have a bunch of young people been so disenfranchised as now. Millennials – at least many of them – think they were born into a time of turmoil, disentitlement, high costs, low wages and distress. They fantasize that Boomers or GenXers emerged from their fartsy arts degrees to land great jobs, buy cheap houses and let inflation make them wealthy.

Here, for example, was some moister math published yesterday:

$250,000 detached house in Toronto 20 years ago.
DP 20%.
Mortgage rate of 12%.
25-year amortization.
Monthly payment = $2,106
$1.2 million detached house in Toronto today.
DP 20%.
Mortgage rate of 3%.
25-year amortization.
Monthly payment = $4,552
I’m not good at math. Which amount is more affordable? $2106 or $4552?
Have salaries gone up 2.5x in the past 20 years?

So, it all begs a simple of question of how much less affordable houses are today. Absolutely, prices are ridiculous. But mortgages are available for less than 3%. Two generations ago buyers had to come up with a 25% downpayment, and one generation ago that was trimmed to 10%. But today it’s just half of that amount, at 5%. Additionally today a young couple can raid their retirement savings for a tax-free $70,000 downpayment that need not be fully repaid for 15 years. Plus, unlike previous gens, parents now collect big government cheques, tax-free, that can be used to subsidize mortgage payments. On the negative side, buyers have larger closing costs, especially in places like Toronto, corporate pensions are a rarity (so personal savings matter more) while Airbnb and speculation have helped boost competition for houses.

Anyway, a simple comparison of the burden of buying a home might be in order. It’s a rough calc. Lots of variables are left out. And it’s specific to only one market (Toronto). Since all real estate is local, the results may be different in your hood. And for the purposes of the comparison below, we’ve assumed a buyer would put down 10% (even though Boomers were forced to cough up more, and today it’s just 5%).

GenX buyers in 1999

First, what was the situation 20 years ago when the average Gen X was turning 30, feeling house lusty and plunging into home ownership?

Back in 1999 the average Toronto property sold for just $228,354, which seems nostalgic. The median household income was $50,800, and the average rate on a five-year mortgage that year was 6.72%. So to carry a home loan of $205,5000 would cost $1,404 a month, or $16,848 a year.

The price-to-income ratio of that property was 4.5, and to carry the average home took 33% of average GenX pre-tax income.

Baby Boomers buying in 1985

Now, how about the Boomers?

In 1985 most of them were about the same age – in their early 30s. The average Toronto property was changing hands for a lowly $109,094 – a price that would surge more than 200% within the next four years during a speculative boom. The median household income was $31,965, and interest rates were nuts. A five-year mortgage that year was at 13.25%.

So a mortgage of $98,184 cost $1,100 a month, or $13,200 per year. The price-to-income ratio was 3.5, but to carry that home required 41% of pre-tax income. Over the next few years interest rates declined, and real estate values exploded high before peaking in 1989, then crashing 32%. They would take 14 years to recover.

The Millennials, buying now

What about today?

A Millennial buyer in Toronto faces an average property price of $778,300. The median household income has grown to $82,110 (the latest figure available, 2016). Mortgages are available for 3%.

So a $700,500 mortgage requires a monthly of $3,100. The price-to-income ratio has exploded higher – to 9.5. But because mortgage rates are near historic lows, it takes 45% of pre-tax income to finance it.

Conclusion: Real estate values are a function of the cost of money. The cheaper loans are, the more houses command and the bigger mortgages get. So when interest rates decline, the price-to-income ratio jumps explosively. That’s the situation now. However, the most important measure of affordability is the income required to service the debt.

So, Boomers shared a similar affordability problem to that which the Mills now face. Gen Xers, on the other hand – those cloistering helicopter moister parents – rode history’s coattails to easy wealth. May their basements forever be occupied.

Laying an egg

Easter. Woo-hoo. Bunnies. Crocci. Chicks. Grass. Eggs. And, of course, house-horny moisters. Millions of them. Now in their early twenties to mid-thirties, Millennials make up almost a third of the entire population – 10.1 million of the little peckers. As the Boomers turn into wrinklies, enter their Thirsty Underwear Years and make funeral homes happy, the Mills are taking over. One month at a time.

But here’s the thing. That generation has a serious case of adultus interruptus. Fully 35% of Millennials still live with their parents – something unseen since the country was an agrarian backwater. A mere 16% are married (or whatever) with established households. Two-thirds of this cohort own no property.

Of course real estate for the moisters is not what it was for their parents. Mortgage rates may be near historic lows, but house prices border on record highs. Meanwhile linear careers have given way to a gig economy; excessive and costly levels of education are now the norm; the 2008-9 crash begat a generation terrified of risk; helicopter parents created cloistered, clingy kids; and millions of Mills have elevated expectations crashing up against financial reality.

So a new bank survey states the obvious. Over 80% of this group aspire to be homeowners. To achieve that they’re willing to sacrifice as no other generation before ever has… six in ten say they’ll cut back on $5 specialty coffees, 56% report they will try to curtail shopping and half will pay the ultimate price and reduce entertainment spending. Smart phones, tats, nose hardware and weed are not included. There are limits, after all.

Now the interesting point is while a big chunk of the Mills want downtown, urban living, two-thirds say they’d be willing to head to the suburbs, if they must, in order to get an affordable property with more space, in a kid-friendly hood. In other words they’re turning into their parents and (like trout) returning to the same place to spawn. But 73% say they’re unwilling to commute in order to own a place of their own.

Big change here from the Boomers, who understood there’s no replacement for displacement and a man can easily be judged by his fuel consumption. The moisters, in contrast, have given the world Uber, Lyft. ZipCar, rental scooters and all those damn bike lanes. The sharing, collaborative economy so in vogue these days is antithetic to cul-de-sacs, regional shopping malls, arterial roads, grassy backyards and four-bedders with double-car garages. But this moment was destined to come. And now it’s spring, 2019. Big urges.

This brings us back to the B20 stress test, which is the main obstacle standing between the 30-year-old MLS virgins and the real estate they lust for. By requiring new buyers to qualify for a mortgage at 5.4% when they can borrow at 2.8%, the test has reduced credit by a fifth, kicked about 100,000 people to the curb, toppled sales numbers and helped reduce prices across the country by about 5%. In some places, for some types of houses, the decline is closer to 20%. But those are homes few can afford.

In fact by dropping the amount most people can borrow, the test increased competition for cheaper real estate. The typical garden shed-sized downtown Toronto condo now costs over $554,000, up about 8% in the last year – at the same time detached house values have fallen. The test also pushed a lot of buyers into the voracious arms of subprime lenders, happy to make bets on higher-risk buyers who end up paying twice or three times the rate available at the banks. This, CIBC concluded a few days ago, is a big deal. When borrowers go to alt lenders because the banks won’t give them money they slip out of the insured mortgage world. So when the next recession comes along there could be a whack more personal failures. That’s how real estate crashes start.

It’s worth noting that the alt lenders now constitute the fastest-growing portion of the entire mortgage market. Four years ago these guys had about 5% of the business. Today it’s tripled. In addition, real estate-drenched credit unions have moved in to sop up a lot of business the banks rejected because clients failed the test.

“For this reason,” writes veteran mortgage broker Rob McLister, “some are calling on policy-makers to regulate the entire mortgage market. While this seems appealing on the surface, it could drastically limit liquidity and leave tens of thousands of borrowers with no viable lending options. Private lender red tape could result in a surge of defaults and bankruptcies, as many borrowers are left with no “lenders of last resort” to turn to. Indeed, that “cure” would be far more devastating than the illness.”

It’s a dilemma. The kids want digs. The market needs cooling. Alt lending is a danger. And Millennials are now the biggest voting block, with a troubled government heading to the polls. Will the test be nixed? Or will the government force the Mills into a soulless suburban gulag, imprisoned for hours a day – hollow-eyed, stressed and defeated – in a machine hurtling down some death expressway, spewing carbon?

You must ask?