Many of us in our 40s and beyond understand the equity-building benefits of home ownership. I feel some younger people do not, however, and I fear for their long-term financial comfort and stability.
Young people in their 20s and 30s have a number of reasons for choosing to rent long-term, rather than buy. Top of the list is no doubt affordability, particularly here in Metro Vancouver. But other priorities; a feeling that renting is the "new normal"; a short time perspective; the simplicity; the “shared economy” mindset; and a belief that society and government will come through for them all play a role as well.
Playing the long game
Yes, it can be extremely difficult to get into the market, especially here in Vancouver. But home (or rental home) ownership, no matter where or how modest, is worth fighting for. The alternative? I really see, for some young people, a life of serfdom. Yes, that may be extreme, but the facts speak for themselves.
Here's the basic math: A $2500 / month rental payment (a one or two bedroom condo in some areas) will slowly ratchet up over 25 years to $5200 / month, with the allowable 3% annual increases. That's more than $62,000 per year! And over that 25 years, the renter would have paid more than $1 million in rent! That's $1 million in the landlord's pocket. And that's payment in after-tax dollars; the renter would need to earn significantly more than that just to pay rental costs. Of course, that's just 25 years. It's likely that some younger people may be paying rent for 30 or 40 or even 60 or 70 years.
Alternatively, by choosing to purchase rather than rent, that same person could have a paid-off home at the end of 25 years. Simple math again: A $750,000 home that increases in value an average 3% per year will be worth $1.6 million in 25 years. And it could be worth much more. Most importantly, once paid off, that homeowner needn't worry about meeting a monthly mortgage or rent payment, ever.
The future: Comfort and security, or not?
I don’t see much potential for incomes and pensions/RRSP savings increasing at a level to support the sort of rent payment likely in 25 years. And what about 50 years from now? With health advances it's not a stretch to assume many more people will be living well into their 100s. Where will their long-term income come from to continue paying rent? Or to support them in assisted housing as they age? Or to buy food or other necessities? Government (i.e., taxpayers) may end up supporting many, many people in their elder years who just don't have the equity or income to support themselves after they retire. Or government (taxpayers, again) may choose not to support financially strapped seniors to the level of comfort they expect. It could end up being a hard-scrabble existence for many.
Home ownership has traditionally formed the basis of long term financial stability. Home and/or rental property ownership by as many citizens as possible will, I believe, result in a better society for all. I believe one of the best things an individual can do to help themselves, as well as society overall, is to be as self-supporting as possible now, and plan for and make the moves now to be fully self-supporting in their later years.
Beyond the Vancouver perspective
Getting into the Vancouver market can be difficult. But there are options. Some of us here in Vancouver assume our children will never be home-owners here. But if not here, why not elsewhere? Time and compound interest work the same way in Saskatoon or Campbell River or Montreal or Kelowna as it they do in Vancouver. Buy something elsewhere where the purchase price vs. rent is more favourable; hire a property manager to rent it; and let time, compound interest and paying tenants work in your favour. This is what many offshore owners do right here in Vancouver. If you still need or want to live here, rent from one of them! You’ll still be miles ahead later in life with a paid off asset, or several, in other cities or towns, with passive rental income that could supplement your life-long income, and perhaps continue on to your children or grandchildren. The rental inflation math above will work for you, rather than against you, if you own the asset.
I do apologize for this somewhat sombre newsletter. The future for young adults here in Metro Vancouver does cause me concern. I worry about affordability for those who understand the long-term benefits of home ownership, and who wish to buy. But I also worry about those who fail to really think about their own financial futures. Some of this latter group, I believe, may be unduly influenced by the utopian views of external influencers: politicians, media, interest groups with their own biases and opaque motivations, etc. And it's these young people who may just not realize the long-term financial effects of their current views and choices.
Please feel free to share this email with the young people in your life. And, what are your thoughts and ideas on this topic?
To the market now!
To change the focus somewhat, if you're thinking of making a move this year, now is the time. The real estate market does tend to slow close to Christmas; however, there are several weeks until then to get things done!
This article originally appeared in my November e-news. Contact me anytime via a quick email or phone call at 604-328-9006 if you'd like to subscribe to my monthly e-news, or if you have any real estate questions or queries. I'm always happy to chat!