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.