The past couple of years have provided some badly needed perspective on the financial benefits of home ownership.
And then, in a flash, a lot of progress was undone. All it took was a Statistics Canada report showing that homeowners are much wealthier than renters. Gulp. How will young people priced out of home ownership ever build the wealth they need to retire and reach other financial goals?
Four answers to that question:
- They will live longer than previous generations, which means they will likely work longer and have more time to save in registered retirement savings plans, tax-free savings accounts and first home savings accounts. Any unused FHSA money can be added to an RRSP.
- They will benefit to some extent from a modest workplace pension renaissance where both defined benefit and defined contribution pensions are becoming more accessible to smaller employers.
- They will receive a Canada Pension Plan enhancement that produces bigger retirement benefits for people retiring decades from now.
- They will learn the secret power of renters, which is having extra money to invest compared with homeowners who are loaded down with property taxes, rising insurance premiums, sneaky maintenance costs and constant pressure to upgrade/renovate/beautify their home.
Retirement for millennials and Gen Z will require more work than for baby boomers and Gen X – let’s be clear about that.
Great returns over the decades from real estate and stocks make now “a perfect time for retirement,” said Janice Holman, a principal at actuarial consultants Eckler Ltd. “For the younger generation, who can’t afford to save because their day-to-day finances are more strenuous, I do feel that they will be in a more disadvantaged position.”
The higher net worth of homeowners is a distraction in helping young adults manage this adversity. Statistics Canada said the net worth of young homeowners is at least 10 times that of renters of the same age, while people nearing retirement have a net worth close to 30 times higher than comparable renters.
In large part, these disparities reflect the fact that renters have historically been lower-income people. Renting in future will attract a broader demographic. People with decent incomes will rent because they cannot afford homes in expensive cities and choose not to live in suburbia or beyond. This new class of renter will have money to invest in a way that approximates the homeowner’s rising equity.
Rents are expensive today, but they remain a vastly cheaper way to live than owning. Every aspect of home ownership gets more expensive by the year – home insurance, property taxes and maintenance. Also, let’s admit that home ownership hasn’t been much of an investment opportunity lately.
National average resale home prices are still about 18 per cent below the early 2022 peak, and expensive cities such as Toronto and Vancouver have been stagnant lately. The ownership narrative for recent buyers is that they are paying more as a result of higher mortgage rates to carry an asset that has not delivered the expected price appreciation.
Lower mortgage rates could revive the housing market, but that would likely mean worse affordability as prices rise. Affordable homes can be built outside cities, but how long will the commute to the city be, and how appealing will it be to live in these distant neighbourhoods? No matter how you forecast housing, there will be more renting.
A renter who is disciplined about investing can create substantial wealth, but it won’t all be tax-exempt like a principal residence is when sold. Only tax-free savings accounts approximate houses from a tax point of view over the long term, and the annual TFSA limit for this year and next is $7,000.
What renters gain over homeowners is a more practical form of wealth. Home equity must be tapped by borrowing through a home equity line of credit or reverse mortgage, both of which carry hefty interest costs. Otherwise, you have to sell and move somewhere cheaper.
Finally, some words of encouragement for millennials and Gen Zs who feel they will never own a home. A lot can happen in the next few years to put you in a better position to buy, including pay increases, promotions or new and better jobs. Fresh data from the U.S. show the average age of a first-time buyer is 38.
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