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Spawn
A third of all real estate buyers in the godless GTA will be virgins, says a local broker who just did a survey (so it must be true). The average they’ll spend, with closing costs, will be half a million. The average downpayment (thanks, Mom!) will be 22%, or about a hundred grand. The average age, assuming these are Millennials, will be 26.
And thus it begins. A lifetime of managing debt.
Of course, half a mill doesn’t buy a whole hell of a lot in Toronto these days. The average detached is over a million, and even a slanty semi on a street where small rodents go to die is at least sevenish. Condos in 416 average about $420,000, and if you want a townhouse for under five, you have to travel to a place like Milton, where the Internet’s not hooked up yet. But you can keep a cow.
Prices are high because rates are low. And people are nuts.
Did you catch those two scary polls yesterday? Manulife released an “investor sentiment survey” which showed how much we suck at being investors. Over a third (34%) think it’s a good time to invest in cash. Cash. Seriously. With a bank savings account paying 0.6% (on a minimum $5K balance), the interest fully-taxable, and inflation at 1.5%, this is a formula for losing money.
Americans get it. Only 13% of them think cash makes sense.. But then, 60% of US investors are confident investing in equities, while here that number plunges to 44%. Of course, above all, people here want a house. The homeownership rate of 70% should be pushed to 72.5%, says our prime minister, while in the States it has dropped to a 40-year low of 63%. Even scarier, with real estate values at record levels, most of your neighbours, colleagues and confused family members swear this is “a good time” to take the plunge into real estate.
Which brings us back to the moist Millennials and their average $400,000 mortgages, taken out at the lowest five-year fixed rate ever.
Here is the second survey, this one from BeeMo. Just in time for Hallowe’en and the new series of Walking Dead. The bankers found if monthly mortgage payments were to increase by $500 that 16% of people would be utterly screwed, another 27% would be somewhat screwed and a further 26% would worry about being screwed. In short, about 70% of everyone owning a home would be negatively impacted.
In practical terms on that $400,000 moist Millennial mortgage, that would mean a change in the fixed-term five-year rate from the current 2.5% to a little less than 5%. Is it possible for rates to do that within the next five years? You bet, kids. In fact, most economists I hang with fully expect when the Fed starts moving that rates will increase 1% a year for at least the next couple, with Canada following along.
Even if you don’t actually believe it, you should probably get ready when the cost of money’s at an historic low. Which ain’t happening. Says the bank:
“Statistics have shown that debt service rates have not changed very much from the early 1990s, when interest rates were much higher. It appears that many Canadians have used low interest rates to get larger loans on more expensive houses rather than to aggressively repay their debt.”
Well, there ya go. What else are we to expect when we’re breeding a culture of indebtedness into all that spawn? The deadly combination of the Bank of Mom (providing kids with money they neither earned nor deserve to buy an asset they could not otherwise afford) plus financial illiteracy (houses good, other stuff risky) is setting us up for a giant societal surprise.
Most people are unbalanced in their financial lives, and totally undiversified. They have embraced that one-asset strategy that’s concentrating most of their net worth in a house, and at the same time have snorfled debt which will certainly reset at higher rates. They have zero Plan B. Worse, they think houses have increased in price because they’ve grown more valuable. In reality, houses trade for more because carrying costs have fallen. Once that changes, so does everything else.
Sadly, the men running to be prime minister would rather pander to the house lust than help families become financially secure. If they understand what they’re doing, God help them. If they don’t, she’d better help us.
Source: http://www.greaterfool.ca/2015/10/06/spawn/
