No generation has had a tougher time getting into the housing market than Generation Y. Indeed, the deck is stacked against Millennials, many of whom are burdened with crushing student debt loads, grim job prospects, and limited wage growth in a stagnant economy. Furthermore, the federal government cracked down on 40-and-35-year amortization mortgages, mostly to avoid a U.S. style housing collapse, and there’s talk of raising the minimum down payment from 5 to 10 percent.
Yet housing prices have continued to surge over the last decade, particularly in appealing centres such as Vancouver and Toronto, fuelled by record low interest rates and booming condo sales.
Related: Home Buyers Regret
But first time homebuyers still represent a large portion of the housing activity in Canada. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), an estimated 210,000 of the 425,000 homes purchased in 2014 were from first-time buyers.
Down-payments for First Time Home Buyers
These property virgins aren’t just putting down the bare minimum in order to get into the market. CAAMP estimates that, on average, first-time buyers make down payments equal to 21 percent of the price of their homes. That’s no small chunk of change. With average home prices across Canada surpassing $450,000 this summer, a 21 percent down payment represents nearly $95,000.
So where does the money come from? Here’s what the CAAMP survey found:
Personal savings (40 percent) – First time home buyers are using their own savings to get into the housing market – with a reported 40 percent of total down payments coming from the personal savings of applicants and their co-applicants.
Tax-free savings accounts represent a flexible way for first-time buyers to save up for a down payment. With annual contribution limits rising to $10,000 this year, couples have the potential to save up to $20,000 per year inside their TFSAs and invest the funds in a variety of ways – from high interest savings accounts and GICs, to stocks, mutual funds, and ETFs.
Gifts and loans from family (17 percent) – Funds procured from the bank of mom and dad are on the rise. Gifts and loans from family represent 17 percent of down payment funding for first-time buyers, which is up from 13 percent five years ago.
While not as significant a source as some might speculate, gifts and loans from parents and other family members are becoming more common in expensive markets like Toronto and Vancouver.
RRSPs and Home Buyers’ Plan (12 percent) – Withdrawals from RRSPs using the Home Buyers’ Plan (HBP) have declined in recent years, down from 16 percent between 1995 and 2004.
The HBP allows first time home buyers to withdraw up to $25,000 from their RRSP to put toward a down payment on a home. But with declining savings rates, a relatively low maximum withdrawal amount (when compared to the amount needed to qualify for a home today) and the introduction of the TFSA, the HBP may have become redundant in today’s market.
Related: My biggest home buying regret
You have up to 15 years to repay your HBP loan, starting in the second year after the year in which you withdrew the funds. But research from Canada Revenue Agency suggests that 35 percent of HBP withdrawals are not repaid each year.
Final thoughts
Although it’s become increasingly more difficult to buy a home today, it’s clear that first time homebuyers are the engine that fuels the housing market – representing nearly half of all home buying activity in Canada.
The challenge comes when first-time buyers can’t save fast enough to keep up with a hot real estate market. That type of pressure can lead to emotional decisions, such as buying before you’re financial ready, or borrowing the funds through alternative lending or cash-back mortgage incentives, all in order to avoid getting priced out of the market forever.
This week Tangerine unveiled details of its long-awaited first credit card; the Tangerine Money-back card. Expected to launch in early 2016, this no-fee MasterCard will offer 2 percent cash back in two spending categories of your choice, and the option to have your cash-back deposited into a Tangerine Savings Account to unlock an additional 2 percent category.
In other rewards news, Capital One made some ground-breaking changes to its Aspire Travel cards by eliminating the tiered structure for redeeming points and allowing partial redemptions, for example the ability to redeem half of an overseas flight.
But before you go off and apply for what might already be the best value travel rewards card in Canada, you should know that in a few weeks Capital One will introduce a new 40,000 point early spend bonus on its flagship Aspire Travel World Elite MasterCard, worth up to $400 in travel rewards, when you spend $1,000 on the card in the first three months. Check my Rewards Cards Canada blog for more details on when that offer gets released to the public.
While Capital One enhances its rewards program, TD is devaluing its TD Travel Rewards Program – which affects TD First Class Visa Infinite cardholders. Starting November 15th, it will take 250 points to equal $1 in travel savings – a 20 percent reduction in value from the previous rewards structure.
This week’s recap:
On Monday I wrote about the worst financial advice ever given to Millennials.
On Wednesday Marie started a new series – financial management by the decade; a look at the teen years.
On Friday I shared a conversation about Gen Y money.
Weekend Reading:
Financial Uproar wrote about a topic familiar to Boomer and me: Should parents buy a house for their kids while they’re at college?
Former Nortel employee Alan Whitton says his biggest purchase was not his house, but a pension buyback.
Many of us have our financial awakening after experiencing some kind of shock to our finances, whether it was losing a job, coming up short for rent, or facing an unexpected tax bill. Carl Richards explains three ways to trigger your financial wake-up call without experiencing the trauma of an actual shock.
Money Time blogger John Ryan looks at the difference between needs versus wants, which often lies in-between “survival versus luxury”.
An argument against the core-and-explore investing strategy, James Osborne says the “explore” part of your portfolio should come with a warning label:
“WARNING: THE ACTIVITY YOU ARE ABOUT TO UNDERTAKE IS ALL BUT GUARANTEED TO INCREASE YOUR PORTFOLIO COSTS, INCREASE TAX DRAG AND REDUCE YOUR LONG-TERM RETURNS. YOU ARE EXTREMELY LIKELY TO DO A TERRIBLE JOB AT TIMING THIS TRADE AND YOU SHOULD RECONSIDER IF STAYING IN A LONG-TERM POSITION WILL BE BETTER FOR YOUR INVESTMENT RESULTS.”
Many hedge finds have a fee structure called 2-and-20, where investors are charged a fixed 2 percent, no matter how well the fund performs, and a 20 percent performance fee for any profit over-and-above its benchmark. The Globe and Mail’s David O’Leary explains why performance fees are a scam.
The Motley Fool’s Morgan Housel looks at the tyranny of the calendar, and argues that one-year returns are a useless metric for measuring investor performance.
A Wealth of Common Sense blogger Ben Carlson pulls out some Frank Underwood, House of Cards, wisdom on how to prevent the next crash.
Helaine Olen says financial advice aimed specifically at women sounds like a great idea, but misses the mark.
Jason Heath answers a reader question about retiring in a down market.
Cait Flanders takes a creative choose-you-own-adventure approach to her finances.
Finally, a 15-year veteran banker offers up 10 pieces of advice about money.
Happy Thanksgiving weekend, everyone!
The plight of Gen Y is a hot topic around the personal finance blogosphere these days, and for good reason. Millennials continue to face strong headwinds from an economy that has been stuck in neutral since the global financial crisis of 2008.
Meanwhile, the cost of higher education is soaring and new graduates are entering a workforce where employers are more likely to hire temporary or part-time workers, rather than provide full-time jobs with benefits. Record-high real estate prices could also mean that we’re raising a generation of renters (not that there’s anything wrong with that) and boomerang children.
But despite having it tougher than previous generations, there are opportunities for Millennials – who this year overtook Baby Boomers as the largest demographic – to forge ahead and carve their own path in the new economy.
Related: The worst advice ever given to Millennials
The LSM Insurance team reached out and asked me some questions about Gen Y money and how Millennials are handling their finances. Here are the questions, along with my answers.
Gen Y Money
Among your readership, what percentage would you estimate are Millennials (born between the early 1980s to the early 2000s)?
I was a bit surprised to see that just 30 percent of our readers are in the 18-34 demographic. Nearly the same percentage of our readers is age 55+.
Would you say Millennials are under-educated with regards to their personal finances?
It’s not just Millennials who are undereducated when it comes to money. The vast majority of Canadians don’t understand the basics of personal finance. It’s hard to teach your kids how to be smart with money when you don’t have a good handle on it yourself.
What are some reasons why Millennials should start managing their personal finances?
Millennials should start managing their personal finances because there’s never been a better time to take control of their financial situation. Information is plentiful. Smart-phone apps, like Mint.com, and budgeting tools like YNAB, can help, as can reading blogs and participating in forums like Reddit, the Canadian Money Forum, or Red Flag Deals with other like-minded individuals.
The advent of fee-only financial planners and online investment services (aka robo-advisors) means that Millennials can work with someone who puts their best interests ahead of his or her own.
Related: How this unconventional pair can save you money on your investments
When it comes to investments, Gen Y might be more inclined to use a robo-advisor like Wealthsimple to manage their portfolio. An robo-advisor takes a rules-based approach to managing and rebalancing your portfolio based on unique individual needs, rather than chasing a gut feeling, last year’s winning fund, or the investment product that pays your advisor the highest commission.
What can financial institutions do to engage and serve more Millennials or, at the very least, encourage them to start thinking about financial planning?
Financial institutions need to do more with technology to get Millennials engaged with their bank and their finances. Start by making it easier to do business online or with a smart phone. Online lending applications are brutal and often still require customers to visit a branch to sign documents or meet with a representative.
Robo-advice is a huge technological breakthrough and if there is a way to automate the more difficult aspects of your finances then Millennials might be more apt to talk to an advisor about goals and planning.
Also, be more open and transparent. The Internet has made it easier to shop the competition. Yet, for example, banks still send out mortgage renewal notices at the posted rate, rather than offering their best and lowest rate first. That type of behaviour won’t earn the trust of consumers.
What are some things younger people should be concerned about, that their parents never really had to worry about?
I think the general consensus is that this generation will face high student debt, high housing prices, and stagnant wage growth in the traditional economy, lower investment returns, and higher taxes over the long term.
Related: Why multiple income streams is a better emergency fund for Millennials
But there’s a new frontier in which Gen Y can thrive, and that is driven by technology and the knowledge economy. So many new jobs exist today that our parents would have never envisioned 10 or 20 years ago – like a social media manager or digital content manager. A savvy Millennial can get ahead if he or she focuses on the new economy rather than trying to fit into the old one.
Finally, one last thing that has always bugged me about generation issues is the people who believe the Canada Pension Plan will be raided by a future government to pay for deficits. That’s highly unlikely to happen and in fact our CPP is actuarially sound for at least 75 years, according to the latest research. It’s not going anywhere.