No single issue highlights the financial predicament of millennials like home ownership.
Rising tuition costs and the growth in temporary work at the expense of permanent jobs are definitely challenges for young adults today. But the cost of houses outweighs them because it affects their financial well-being today, and in retirement.
A poll to be issued by KPMG on Thursday lays out the problem in depressing detail. Millennials are eager to buy homes and bear the financial load, but they also recognize that the cost of home ownership will hurt their ability to save for retirement. Some will never afford a home, which means they won’t have a potentially valuable asset to deploy as part of their retirement plan.
“What happens in retirement to a group of people who can’t afford to buy a home?” said Martin Joyce, KPMG’s partner and national leader for human and social services. “Pensions and RRSPs provide some income, but it might not be enough.”
The KPMG poll was based on input from 2,500 people, which includes 1,000 young adults between the ages of 23 and 38. Something that unites the generations is a belief that home ownership is good for your retirement. Seventy-eight per cent of Canadians said home ownership is an investment for financial stability in retirement, while 73 per cent of millennials answered this way.
It’s not easy to afford a home today because, while interest rates remain invitingly low, price increases in many cities have far exceeded rises in personal income. Still, millennials remain strong on home ownership – 72 per cent strongly or somewhat agreed that their goal is to own a home, and 69 per cent agreed that owning a home is worth the financial burden.
Will they actually be able to buy? The KPMG poll found that only 54 per cent of millennials expect they will ever be able to afford a home, which sounds a bit overly pessimistic. Some who cannot afford a home today may decide to move to a cheaper market, or advance in their career. (Almost two-thirds of respondents in this cohort live in Vancouver, Toronto or Montreal.)
There’s still reason to wonder whether home ownership among millennials will match previous standards, though. KPMG cited Statistics Canada numbers showing that 70.1 per cent of people aged 35 to 54 and 76.3 per cent of people aged 55 to 64 owned a home in 2016.
Frankly, homes are overrated as a retirement asset because they’re illiquid. Home equity lines of credit and reverse mortgages allow you to tap into your home equity, but you have to pay interest. Downsizing to a smaller home can free up money, but boomers are discovering that their ideal retirement location costs nearly as much as the family home is worth.
What paid-off homes do offer retirees is a place to live without regular rent or mortgage payments (yes, property taxes and maintenance expenses are required). Homes are also an asset that can be sold to generate funds to pay for a retirement home or long-term care.
Renters are hardly defenseless against the cost of retirement. Because their year to year spending on rent is much less than the full load of home ownership costs, they have an opportunity to save and invest funds the homeowner doesn’t have.
But KPMG’s Mr. Joyce wonders how possible this is in cities such as Toronto and Vancouver. “The price of rent is pretty exorbitant,” he said. “And therefore, having spare income available to invest becomes a big issue.”
Homeowners have the same problem, though. Forty-two per cent of millennials in the poll agreed that they have put saving for retirement on hold to pay off their mortgage. Two-thirds worried that buying a house today and delaying retirement saving until age 40 or 50 presents a risk that they won’t be able to save enough.
Whatever decisions millennials make about renting and home ownership, it’s crucial to find a way to save for retirement. Pensions are becoming more scarce in the workplace, and so are the full-time jobs that offer any hope at all of a pension.
Something new to add to the list of financial realities that are different for millennials: how expensive housing is making it harder to save for retirement.
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Rob Carrick