It’s a safe bet Santa will be receiving plenty of requests for a new home among his stacks of mail: the largesse of St. Nick is the only way younger Canadians can expect to have a house of their own.
Skyrocketing prices have placed home ownership out of the reach of millennials – those between the ages of 23 and 38 – already caught in a financial squeeze that includes soaring personal debt levels, much of it related to student loans.
A new survey by the accounting firm KPMG found that 72 per cent of millennials would like their own home, but half of them say that’s nothing but a pipedream.
Of those who’ve been able to buy a home, 46 per cent received financial aid from their parents to do so, an indicator of what a stretch ownership is.
Rising costs have put housing out of the reach of even those with good jobs, the study finds.
Soaring house prices and rising personal debt are making it impossible for many millennials, even those with good paying jobs, to ever afford a home, finds a new poll commissioned by KPMG in Canada.
“The combination of rising house prices, high levels of personal debt and annual incomes that are just a fraction of the cost of buying a home compared with their parents’ generation, is pushing the dream of home ownership out of reach for many millennials,” says KPMG partner Martin Joyce of the poll’s findings. “This is particularly challenging in the markets of Vancouver and Toronto.”
Millennials have incurred high levels of student debt and those who have been able to enter the housing market have taken on larger mortgages relative to their incomes than those who came before them, according to Statistics Canada. While millennials have higher incomes than previous cohorts, in part because of the education they’ve pursued, they are not necessarily better off, the poll indicates.
Household debt has been on an upward trend for the past 30 years and recently reached record highs, making home ownership even more unaffordable, especially in tight markets. Whereas the average debt-to-disposable income ratio in Canada was almost 87 per cent in 1990, it was more than 175 per cent at the end of 2018 – a trend that has caused the Bank of Canada to raise alarms about the country’s economic vulnerability.
Debt-to-income ratio is a key financial indicator and, for young millennials, that now stands at 216 per cent, far exceeding the 125 per cent for Gen-Xers and 80 per cent for baby boomers at the same age – primarily because of mortgage debt. Wage growth has also been slower than expected, the Bank of Canada has warned.
Low interest rates were a big factor in both rising prices – easy money artificially inflated prices – and in Canadians taking on more debt, as today’s lower rates meant we could afford a mortgage twice the size of what would have been offered 20 years ago.
In essence, we could borrow more, so we did. That in turn drove up housing prices to meet – and exceed – our buying capacity.
Although typically cast by the industry as a bad thing, reforms are needed to bring housing back into the realm of affordability. Better to cool down housing market than wait for the bubble to burst, though we’ve been waiting for that pop for a long time now.
The wider industry, including financial sector, developer and builders, would prefer the government keep pumping the real estate market that’s driven a good chunk of the economy while putting Canadians even deeper into debt, all the while excluding growing numbers of people with artificially high prices.
The arguments are clearly self-serving. The bigger picture must be taken into account, particularly the on-again, off-again bursting of the housing bubble.
Whatever one’s take on that situation, the new survey shows there’s a big impact on younger would-be homeowners.
Millennials now take an average of 13 years to save for a 20 per cent down payment, while it took their parents just about five years in 1976, according to a Canadian Mortgage and Housing Corp. report.
“That’s eight fewer years that millennials might have for saving more for their retirement,” says Joyce. “If they do manage to save up and buy a house now and delay retirement savings, our poll finds 65 per cent of millennials fear they won’t have enough saved for retirement.”
Those fears have spurred calls for action from the government, a concern shared across generations.
The KPMG polls found a majority of Canadians want Ottawa to take action to make housing more affordable, make it easier to use RRSPs for down payments, raise TFSA limits, and implement a new registered savings system, like RESPs for education savings, to make housing more affordable.
“It seems pretty clear that millennials are in a unique situation in terms of their ability to purchase a home – which has historically been a foundation for retirement stability – and most Canadians agree that the government has a role to play in making it a more achievable dream for many of them,” says Joyce.
Price decreases could help those looking to get into the market down the road, but that upside could be offset by the fact credit is harder to come by. Lenders are hanging on to their money, and tightening requirements when they do part with it.
If there is a take-away lesson to be learned when it comes to real estate, it’s don’t take any undue risks. And gambling, which is how we’ve been viewing the housing market, is risky to the core. If we keep betting on ever-increasing prices – with equity loans to match – and allowing too many people to over-leverage themselves, there’s going to be a great deal of pain if the market sees a correction or if interest rates start rising to historical levels. Don’t wager the farm on the boom times to last forever, something younger would-be buyers may be banking on.