With the perfect storm of very volatile markets, inflation, increasing interest rates and super high housing and rental costs, many young people are left in the dust. Have we been therefore? Sure, we have, but not so much in respect of the current level of wages and the cost to enter the real estate market.
The past year’s housing slowdown has dragged down the average net worth of many homeowners in Canada, especially the youngest Canadians stretching to enter the real estate market. But with most Canadians relying on the housing market to build their wealth, there are other ways households should be looking to save and invest for the future.
Canada’s cooling housing market saw the overall value of real estate decline 5 per cent between the first and second quarter of the year, the first such reduction seen since 2018. That especially hit younger Canadians hard, because this age group tends to tie more of its net worth to real estate than older generations who have more diversified portfolios.
Buying a house and investing
The story many young Canadians are told is that they can buy a home and live in it while passively growing their wealth. It has been an attractive tale that’s paid off for many generations. Buying a home becomes something of a forced-savings vehicle as owners pay down their mortgage and the value of the home itself grows. It’s a trend that’s largely been steady except for the Canadian housing crash in the 1990s.
The dollar value of real estate aside, living in your own home provides a hedge against the cost of housing itself, whereas a renter might face sudden fluctuations in the market when they move from lease to lease. You’re living in it. And that’s something very unique to this type of wealth. It has a double-win factor in the minds of Canadians.
But there may are flaws with how closely tied Canadians’ wealth is to the housing market. There are stark differences in the wealth of Canadians who own homes and those who do not as emblematic of the problem: the average net worth of homeowners born between 1955 and 1964 is more than six times that of non-homeowners born in the same period. Wealth inequality in Canada is not just a story of rich versus poor, it is one of homeowners versus non-homeowners. There are generational disadvantages tied to the current system.
Young Canadians who can buy homes in Canada’s increasingly unaffordable housing market are often those already in higher-income brackets and are relying on help from their parents to fund the down payment or other aspects of the purchase. Homeowners beget homeowners.
Hidden housing costs
Issues of fairness and affordability aside, it’s also not clear-cut whether owning a home is always the right financial choice for a household. The notion that home ownership is an excellent way to build your wealth but a home is also a liability. At any time, the roof can leak, the furnace can go, and you might need to do an emergency repair.
Even though home ownership has been this sort of way to really show that I have arrived as an adult, it’s also something that can also cost you a lot of money. So, when you are looking at homeownership as a way to build your wealth, you should look at both sides of the financial equation.
The math around homeownership is not always clear to Canadians on the outside looking in. It’s not enough to just consider the difference between the purchase price and the sale price however many years later. Maintenance costs, property taxes and renovations to the home are recurring and significant costs that take a chunk out of the overall return on a home.
People sometimes get upset when I say real estate is a depreciating asset. It’s true land may appreciate over the long run, but buildings depreciate. You must maintain them and there’s no way around that.
Homeowners are also typically paying more per month than renters though rents have been particularly high lately. But in average years cash flow tends to be better for renters, which gives them more income to invest outside the home as owners incur a kind of opportunity cost in the form of money they could’ve been investing elsewhere.
And while homes have a reputation as a safe, low-risk asset for as long as you’re living in them, owners are more exposed to an uncertain housing market if they have to move. The differences between two cities’ housing markets could be severe, and the costs associated with moving, showing a home and closing on the transaction can be steep. If people are thinking about owning, I would tend to suggest you want to plan to live in a place that you’re buying for at least 10 years to make it have that safe attribute.
Upsides to investments
For Canadians looking for a place to park their money and let it grow for retirement or other future planning outside of the housing market, investments can be a good option despite its reputation as a volatile institution.
This year has been particularly volatile for the markets, as sudden drops and erased gains from the pandemic have routinely made headlines. A current study found almost one in four Canadian respondents have no confidence in the stock market and were planning to cash out before the end of the year.
While the picture may seem dire at present, conditions will acclimatize. They will settle back to some level of normalcy. While investing in a home is still the best way to accumulate wealth, your external investments may have to sit in hiatus or on the backburner for a while. As a financial life planner, we need to re-assure our younger clients that equity will be a primary part of your retirement and estate planning. Savings in general, like retirement savings, may be a second thought or delayed. We can always play catch up as their careers develop and their level of earnings increases. Of course, that is the best-case scenario, but forward thinking is Keeping Life Current.