Relax, already

Boomers are so entitled.

“When the boomers started working, they enjoyed good starting wages and generous retirement benefits — thanks to strong labour unions. As they moved up the income ladder and as some of them took over positions in government, they gave themselves huge tax cuts, greatly weakened the strength of labour unions, and put in place plenty of other perks that they disproportionately benefited from — like income splitting and TFSAs. In a report from earlier this year, the parliamentary budget officer concluded that TFSAs overwhelmingly benefit older, wealthier Canadians. Did I mention the TFSA was first proposed by one of Canada’s most prolific millennial-mocking boomers, Garth Turner?”

Me a Millennial-mocker? Just for calling ’em moist and misguided? For the record, I also think Boomers are hilarious, listening to The Eagles while they drive to Shoppers for a bag of thirsty underwear. But it seems the re-writing of history – as exemplified by the Vancouver Housing Blog quoted above – is getting out of hand.

“When it comes to housing, boomers were able to buy a single-family home on one income. Then they got to enjoy decades of falling mortgage rates, giving them a nice bonus every time they renewed their mortgage. The outlook for millennials is much less rosy. As hard as it is now to buy a place, it’s likely to get much worse when they renew as interest rates have nowhere to go but up.”

Actually while the Boomers were moving through the real estate cycle, interest rates were at levels that would be considered fictional today. I remember renewing a mortgage at 14% in 1990, and thinking how fortunate I was they weren’t 18% any more. Ah well, every generation believes they live in the worst of times and loves to feel victimized. What most people fail to understand is that houses have become unaffordable, and society so lop-sided financially, because money is too cheap.

Wacko monetary policy, in place for the past eight years, has ruined a lot of things. It’s basically destroyed saving, with risk-free assets like savings accounts and GICs paying less than inflation. It’s created an historic bulge in debt at all levels, from governments to families. After all, when a five-year mortgage is 2.4% and inflation is 2.1%, isn’t that like free money? Cheap loans therefore lead to price inflation, since debt service costs are in the ditch. And nowhere is that more in evidence than with the real estate market, as average SFD prices in major cities drift steadily past the seven-figure mark.

So unlike 1990, when my mortgage was 14% on a beautiful property I bought in Ottawa for $319,000, home loan rates are in the 2% range and that same place is selling for almost $800,000. This is no Boomer thing, of course. It’s a function of central bank policy, and every day it remains in place, the world gets a little more screwed-up. The Canadian savings rate has toppled. Real estate values are insane. Debt numbers are off the chart. And now 55% of people (in last week’s BDO survey) say they’d start missing monthly payments if rates were to increase. At all.

As this blog has been yammering on about, this will soon change. US rates will rise for the second time in a decade in June or July, for the third time in the autumn, and for the fourth, fifth and sixth time next year. Five-year fixed mortgages will no longer be in the 2% range and Toronto houses will stop appreciating 15% a year. People taking out mortgages today will renew them at double the rate – a fact of life the bankers are not even stress-testing for.

The Bank of Canada will (of course) follow suit, lest the dollar take more hits, inflation spikes and the destructive asset bubbles continue to inflate. Anyone who believes rates will stay where they are is self-deluding. It won’t be quick, but it will be relentless. And this is the time to prepare.

So, it looks like financial assets have a lot more upside these days than residential real estate. When Millennials can’t afford houses with current loan rates, how can they buy them if rates rise? They can’t. It’s suicide. That’s why prices will fall. It’s also why housing poses such risk, especially in places where demand is greatest, and the Boomer-bashing rhetoric most acute. But the M-gen can certainly take the cash they save renting and plunk it into a TFSA. This blog has already given you the portfolio formula – balanced and diversified, liquid and tax-free. Way less heartache ahead.

Warren gets it.

“I am a 29 year old University educated male living in Vancouver. I am recently married, rent my housing, don’t own a car, and couldn’t be happier. I was inspired to write by your last few posts. Since graduating from our undergrad degrees six years ago, we maxed out our TFSAs and RRSPs and have amassed a liquid net worth of almost a quarter million dollars.

“To me it’s all about focusing on what you can control and who you associate yourself with. Many of your readers complain about social comparison and how they feel next to their home ‘owning’ friends and family. Many of our friends ‘own’ homes but they couldn’t care less if we do. Why should it matter to them if we send our money to a landlord or the bank on the first of the month?

“Our rent is by far our largest monthly expense but I pay it with glee! Crunching the numbers – accounting for condo fees, taxes, and maintenance – our Price to Rent ratio is 54! We live in a new building in a trendy neighbourhood with amazing views of the north shore mountains and downtown. What a benevolent deity our landlord is!

“I hope my story reinforces that not all us millennials are as moist as you seem to think. Some of us heed the sage advice of those who came before us and tune out the hysteria that is the Canadian real estate market. There is a lot to be thankful and happy about living in this country as long as you only focus on what you can control.”

There may be hope yet. And I still love my TFSA, dammit.