Many millennials struggle to own homes, and despair that retirement will be out of reach, especially since they worry about being ‘perpetual renters.’
In fact, the Mercer Retirement Readiness Barometer calculates that a millennial who rents will need to save eight times his salary in order to be able to retire by the age of 68. A millennial homeowner will need 5.25 times his salary in order to be “retirement ready” at 65. Mercer assumes a starting salary of $60,000 from age 25 with monthly contributions of 10% to a savings plan. “Retirement readiness” equates to 69% of pre-retirement income.
John Pasalis, President of Realosophy Realty, agrees with Mercer. “Once you hit retirement, a homeowner has an investment over and above any retirement savings. So, a renter, will need to save more. Furthermore, a homeowner has been investing in a house that has been appreciating, tax free!”
When You Buy a House, It's More Than a Financial Cost
Mercer’s equations are mathematically impeccable… and abstract. Once you throw reality into the mix, things change.
The problem with Mercer’s numbers is that they treat as a strictly financial issue something that isn’t. Owning a house is a lifestyle issue; there are many emotions involved, that make a ‘house’ a ‘home.’
“A house is first and foremost a consumption expense,” asserts Fabien Major, a financial planner and wealth management advisor at CI Assante Wealth Management, adding that a financial planner must take into consideration all the specific circumstances and objectives of clients.
The Real Cost of a House is More than a Mortgage
Josh Varghese, co-founder of Axia Real Assets, is a firm believer in renting and practices what he preaches: he only rents his lodgings.
“The problem I have with house price appreciation, he says, is that it always ignores the money that has gone into it,” he says. For example, when you look around, you might see many houses that were worth $1 million a short while ago that now sell for $2 million, and think that real estate is a great investment. However, you don’t always notice what goes into making that increase in price possible.
Countless renovations and repairs go into the house to make it comfortable and an attractive prospect for the next buyer. This on top of fixed costs like insurance and taxes. And let’s not forget the mortgage, which is often as high if not higher than any rent. Also, if you purchase a condo, you end up with condo fees in the $1,000 range that can amount to another amount comparable to a monthly rent.
“Yes, a house is forced saving, but to say that you need to save 50% more if you rent, that’s far from obvious, Major says. And to say that selling your home will generate an added value is true, but only if you relocate at a lower price. I’ve seen so many retired couples who didn’t go on to buy an affordable home, who wanted to be near their grandchildren.”
If you can rigorously stick to Mercer’s plan, put away money with clock-like regularity into a nest egg, then homeownership is a better bet than renting. But a home is the repository of many irrational urges and expectations that risk eating away a lot of the savings set aside.
There Could Be Better Investments Than a House…
If you want to treat a house as strictly a financial issue, home ownership is not the way to go, Varghese claims, who calls on two time-honored investment principles: diversification and yield. “There’s a severe lack of diversification in a residence, he says. If you put most of your money in only one asset or stock, most advisers will tell you you’re not diversified.
Varghese asks: what is your real yield on a home? “Probably it is only 1.8% and your cash flow can be close to negative. You might as well put your money in only one apartment REIT in Canada. No one will advise you to do that, yet you’d still be better off.”
…But Maybe Not in Toronto
One major consideration tempers Major’s and Varghese’s views: house price appreciation in recent years. Given the conditions of increased immigration and the dearth of housing inventory, this situation could prolong itself.
For example, in Toronto Pasalis recalls, after a fall from a peak of $861,000 in March 2022 to a trough of $708,000 in January 2023, prices have trended back up to $745,000. “Average price appreciation was about 6% before 2015, he says. Since, it’s been 11%. In the present context, ownership is a better bet over the long term.”
DBRS Morningstar agrees, saying that home prices are unlikely to fall in urban Canada.
Who Can Afford to Buy or Even Rent a House Anymore?
That, of course, is if you can afford a house, an increasingly remote possibility for millennials and members of Gen-Z. Even if affordability improved in recent quarters, it is still forbiddingly high at 60.9%, according to the National Bank of Canada Housing Affordability Monitor. That means that the average mortgage payment eats up 60.9% of median income.
The question is increasingly valid for renters: can they afford rents when you consider that average rents have gone up by 20% since the pandemic low, according to the most recent Rentals.ca survey.
The affordability issue causes many millennials to exert a significant drag on their boomer parents’ retirement budget, according to a 2015 CIBC poll, whose findings were recently confirmed by another more recent Bankrate survey in the U.S. “Over two-thirds (68%) of parents of adult children have made or are currently making a financial sacrifice to help their kids financially, states the Bankrate survey. Parents say they sacrificed retirement savings (43%), emergency savings (51%), paying down their own debt (49%) or reaching a financial milestone (55%).”
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