No Avocados were harmed in the writing of this blog post.
A couple weeks ago the internet blamed the lack of millennials in the housing market on our frivolous spending habits. We spend our hard earned dollars on avocado toast which can sometimes cost us $15+, and that’s the reason we can’t afford to buy a home. While $15 toast might seem like a lot to some, giving up this glutinous breakfast delight isn’t going to magically mean you have enough for a down payment on a home. The boomer generation seems to think millennials are terrible with their money and they waste all of it on avocado toast and lattes… but the truth of the matter is that when they were our age they probably had their own version of the avocado toast! Not to mention that homes were far more affordable.
Home prices are astronomical, wages are stagnant
The boomers made a killing in the housing market, and rightly or wrongly they think they’ve hacked the road to riches. The problem is, that while they tell their millennial kids home ownership is the best way to make it they had two economic factors on their side that millennials today don’t!
The cost of a home vs income ratio was significantly less when they were buying houses.
I’m willing to bet if you ask your grandparents what they paid more for: their first home or their last vehicle, it would be the latter. Fast forward to our parent’s generation and when they were entering the housing market homes were 2-3X their annual gross income. When you take a look at our generation you’ll see two things: 1) the price of homes have shot up, a starter home for a young family may have cost $100,000 when our parents were our age, but chances are that these days that same home in one of Canada’s major cities will set you back close to half a million dollars. That’s 5X the cost of what it used to be 2) Wages haven’t kept up. When you look at the jobs our parents took out of university versus the same job now, salaries may have doubled, if you’re lucky. My mom and I both graduated with the same business degree and started work at the same company post-graduation. When I compare what, she made in 1986 ($18,000) and what I made ($42,000) the salaries have increased by 133%. While that might seem a lot, over 30 years that’s 4% per year, which is barely over inflation.
1) The price of homes have shot up, a starter home for a young family may have cost $100,000 when our parents were our age, but chances are that these days that same home in one of Canada’s major cities will set you back close to half a million dollars. That’s 5X the cost of what it used to be!!
2) Wages haven’t kept up. When you look at the jobs our parents took out of university versus the same job now, salaries may have doubled, if you’re lucky. My mom and I both graduated with the same business degree and started work at the same company post-graduation. When I compare what, she made in 1986 ($18,000) and what I made ($42,000) the salaries have increased by 133%. While that might seem a lot, over 30 years that’s 4% per year, which is barely over inflation.
Ultimately, when I look at the affordability of homes for our parent’s generation versus ours, it’s much more of a reach for millennials to be able to purchase affordable houses.
Putting all your eggs in one basket is a recipe for disaster
While I’m ultimately not against home ownership, I’m sure one day the hubs and I will purchase a home, I am against putting all your eggs in one basket. What I mean by this is young to mid twenty-somethings, and probably thirty-somethings as well, taking all of their savings and throwing it at a property. If you’ve managed to accumulate $50,000 would you invest it all in one stock? Maybe you would if you believed that all companies would turn out the way Apple did. But, not so long ago Canadians thought Blackberry was the key to success, and we all know how that turned out. Putting all of your savings into one asset class isn’t wise, if the market decides to go south it’s far harder to weather the storm. Example: Oil & Gas late 2014.
When you’re looking at whether or not you want to buy a home you need to make sure that you’ve laid the groundwork for your retirement portfolio, and investments over the long term. A home is not a retirement plan. I’d argue no more than 50% of your net worth should be tied up in your home, or really any one type of asset class. Diversifying what you’ve invested in allows you to weather the storm if things don’t go your way. Remember you can’t sell a wall of your condo to pay the mortgage if you lose your job. If you’re renting, you can negotiate your rent, or look for a cheaper place to live.
Canadians (Albertans) are obsessed with home ownership and it’s unhealthy
The more I travel the more I see how obsessed we as Canadians, and even more so in Alberta, people are with home ownership. It’s to the point where I see people graduating from University and jumping into home ownership with 5% down. Which let’s be honest, if you’re putting 5% down, you don’t actually own 5% of your home. We are impatient to get into home ownership because for some reason we’ve been conditioned to think that if we purchase a home, we’ve made it to adulthood, and are successful. The thing many young people forget is that while owning your own home may feel empowering at the time of purchase, you don’t actually own your home until you pay the mortgage back. If you were to miss too many payments in a row, the bank takes your home, and you don’t get your money back. In addition to that, globalization is becoming more and more prevalent and while you might purchase a home in Calgary, within a year or two you could be relocated to Toronto and have to sell your home at a loss. Millennials should be careful when it comes to jumping into home ownership, being house poor isn’t fun, and being underwater on your home is even worse.
You Can Have Your Toast & Buy a Home Too
By now I’m sure you’re thinking that I don’t believe in homeownership, and that isn’t the case, I just want Canadians to really think critically before jumping into purchasing a half a million dollar home. In doing so millennials should focus on saving a sizeable down payment, which may mean that you have to delay home ownership by a year or two. Just remember, there is no rush to owning a home. You don’t have to give up your avocado toast or lattes to own a home, you just need to start saving for a down payment that will allow you to purchase a home with more than 5% down (aim for at least 10% if you can’t hit the 20% mark).
If you’re looking to purchase a home some other tips I have are as follows:
- Avoid overpaying for your home
- Wait until it makes sense for you to buy (not the first possible moment available)
- Make a list of nice to haves vs. must haves
- Make sure you’re settled in a city so that you can aim to stay in your home for at least 5 years
- Don’t blame the avocados, they didn’t do anything wrong 😉
Happy home hunting!