A week after unveiling a federal budget in March that contained measures to help people buy a first home, Prime Minister Justin Trudeau visited Vancouver and told a crowd that “owning a house is a big achievement. It’s where you raise a family and set down roots. But far too many young people are worried that they won’t be able to reach that dream.”
He cited the widely held belief that home ownership is something everyone should aspire to, especially millennials. Trudeau also tapped into a fear that young people should be getting into the market, but can’t.
But the data suggests that may not be true. A recent RBC report shows home ownership rates in Canada among households aged 34 and under are high—even in the two most expensive cities (38.9 percent in Toronto and 35.9 percent in Vancouver). The Canadian home ownership rate for millennial households is 43.1 percent. That’s twice as high as Berlin and Paris, and higher than the U.S. (34.5 percent).
In fact, home ownership rates for young Canadians are higher than they have been in the past three decades, and much higher than they were in the early 1970s. But that's not necessarily a good thing.
This cultural belief that home ownership is some sort of rite of passage—that somehow, you’re not adulting until you’re saddled with a mortgage—isn’t doing millennials any favours, according to several economists and industry watchers. At best, it might be wrongheaded or misleading, and at worst, it may be torturing an entire generation unnecessarily.
The notion that buying a home leads to happiness has been disputed by psychologists. According to the theory of hedonic adaptation, the high from a purchase—even a major one—results in a temporary increase in happiness. Once the initial rush wears off, we’re programmed to go back to our base level of contentment.
The impact of this societal pressure to buy homes, negatively affects millennial mortgage holders who may soon find themselves in debts that can't be managed. The obsession to own also affects renters, who are left with units that should primarily be a place to live, but have instead become investments for the rich that can be bought and sold for a quick profit.
“I was highlighting something pretty basic but the topic is so emotional.”
With home prices so steep in several major urban centres across North America, only top income earners and people who have access to The Bank of Mom and Dad have been able to get into the market. A recent Zoocasa survey shows that only the rich can afford average condos (nevermind houses; you have to be really well-off to get one of those) in Vancouver and Toronto.
Bridget Casey, who runs a personal finance business called Money After Graduation, sees owning a home as a set of expenses, just like any other, and one that doesn’t get millennials further ahead in the priciest markets. A tweet she shared last year illustrating some of the benefits of renting versus owning got a huge response. Most of it was negative.
“I heard from people in the mortgage industry and recent homeowners and they were furious,” she said. “I was highlighting something pretty basic but the topic is so emotional.”
Blame the parents
Casey said parents are often to blame for millennials' obsession with home ownership. “Boomers are the reason for this, and they’re the ultimate enablers. They’ve instilled these values in us because home ownership worked out so well for them and now we’ve been taught to strive for it.”
Millennials have ended up with a raw deal, mostly because of timing. According to David Macdonald, senior economist at the Canadian Centre for Policy Alternatives (CCPA), a left-leaning think tank, they’re the cohort that graduated with record debt levels due to climbing tuition fees, and are getting into or faced with “a real estate market that requires dramatically more debt than it did even a decade ago.” His research showed that the people who benefited most from the huge run-up in home prices are those who bought property before the late 1990s.
If you do an apples-to-apples comparison of inflation-adjusted net worth, Macdonald says millennials who are in their 30s now are less well-off than people who were in their thirties in 1999. “That’s a direct result of the fact that it’s much more expensive to get into the real estate market. You have to take on much more debt and you have much less equity.”
You can call it colossally bad timing if you bought in recent years and don’t plan to stay where you are long term. Those who own and aren’t independently wealthy, may ultimately lose money and pay the price for getting in at what may be the peak of the Canadian market. Millennials who bought after January 1, 2018, got hit with higher borrowing costs in the form of tighter mortgage qualification rules, rising interest rates and historically high home prices.
Literally going for broke
According to a recent survey by MNP, the country’s largest insolvency firm, 46 percent of Canadians reported being $200 CAD away from being broke. Being “house poor” is a big contributing factor to living paycheque to paycheque (the widely accepted definition is spending a large portion of your income on mortgage payments, property taxes, maintenance, and utilities).
The latest RBC home ownership poll revealed 39 percent of participants said they are or have been “house poor.” Even more alarming is that 92 percent said mental stress is a result of being “house poor,” and 47 percent said it’s worth the sacrifice. That willingness to put up with worry, anxiety, and financial duress stems from people buying into the cult of home ownership, no matter the price.
Being too focused on owning a home and neglecting other, important things, has long-term social and economic impact too, according to Macdonald. Millennials are delaying getting married, having children, and saving for retirement because of the amount of debt they’re carrying, he said.
Politicians in Canada have tried to cool the country’s housing markets, especially Toronto and Vancouver, with some success. But the latest lending restrictions and stricter mortgage qualification rules have led to an increase in the number of people going to private lenders, an alternative to major banks that aren’t bound by the same rules. TD Bank estimated that borrowing from alternative lenders made up 8.7 percent of the market in the second quarter of 2018, up from 5.9 percent a year earlier.
Industry watchers say there are no signs that there’s a housing crisis of the magnitude of the U.S. subprime mortgage crisis more than a decade ago. But economists say the cult of home ownership and the creation of policies that allowed people to sign up for unaffordable mortgages led to that mess. There are other factors too, but at the centre was a strongly held belief that the American Dream equals owning a home.
One key difference is that in the United States, people have seen firsthand that home prices can drop suddenly and drastically; most millennials haven’t lived through that kind of reckoning in their adult lives in Canada.
According to Jane Londerville, a retired real estate professor at the University of Guelph, young people naively see buying a home as a sure thing. “We didn’t have the precipitous price drops and the defaults like in the U.S. In our classrooms, students think that real estate prices only go up. We have to disabuse them of that idea.”
This hurts renters too
The cult of home ownership hurts renters too, by turning places to live into a commodity for investors and incentivizing the construction of cheap units. Macdonald calls them "glass closets"—new condos that offer little square footage and are not usually designed for families or for more than two people.
Macdonald said the monumental shift towards glass closets came in the 1990s, after the federal government under Conservative Brian Mulroney, withdrew from the financing of public housing projects. They’re a vehicle for getting into the market, as opposed to a place that’s purpose-built and suitable for long-term living.
Toronto resident Kimberley (who asked that her last name not be used because she fears reprisal from her landlord) said she has no choice but to rent for now. The 29-year-old and her boyfriend, whom she has lived with for years, have an annual household income of $140,000—nearly double the national median. But she said owning anything but a “risky cookie-cutter condo” isn’t in their future—they’re priced out of a market where the average home goes for $820,148.
They consider themselves lucky to rent a two-bedroom, two-bathroom apartment in midtown Toronto for $2,300 a month. It’s a “good deal” because it’s below market price, she said.
According to Benjamin Tal, deputy chief economist at CIBC World Markets, a lack of purpose-built rental units means young people who can’t or won’t get into the market are at the mercy of their landlords.
"We need to stop this brainwashing."
Landlords can show tenants the door for a variety of reasons from a family member moving in, to a renovation, or "renoviction." The amount of notice tenants are given depends on where they live, and the reason for the eviction. Abuses of these practices are widely-reported in hot markets. Often the penalty is a fine, which the landlord can pay and still come out ahead.
At the root of it all, according to both Macdonald and Tal, is a collective conflation between guaranteeing people the right to have a place to live that is relatively safe and stable, and the right to own a home. “As we think of housing as a commodity, we encourage people to buy anything, irrespective of whether it’s going to meet their needs over the long-term,” said Macdonald.
What’s perhaps harder to tackle, according to Tal, is the cult of home ownership. “We need to stop this brainwashing. Basically, what I’m saying is that if you’re 35 years old and you’re renting, nothing is wrong with you. I think that we are obsessed with home ownership and it’s the reason why the housing market is so unaffordable.”
Casey suggests millennials write out all the costs associated with home ownership (mortgage, property taxes, insurance, utilities, repairs) vs. renting and take a hard look at the numbers. “They might need to do this every day to remind themselves of what their situation is. If owning a home isn’t right for them, maybe they can grieve and move past it.”
She also recommends a daily reminder that renting can be easier and simpler. If your financial situation changes drastically, you’re not worrying about defaulting on a mortgage. In most cases, it’s easier to pick up and move if you’re renting too. But she acknowledges that even if the math doesn’t add up, there are other factors to consider.
“Even though it doesn’t make the most sense for me financially, I still want to buy. I’ve tried to convince my landlord to sell me my apartment because I want to keep my daughter in this neighbourhood. I guess I’m part of the problem.”
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