A veteran Bay Street entrepreneur wants to demolish the idea that it's smart to buy a house as soon as you can after graduating and starting a career.
Joe Canavan urges young adults to invest in the stock market and avoid home ownership until their mid- to late-30s. Young keeners who buy homes are limiting themselves, he says. They're tying themselves down at a time when flexibility is a real asset, and they're building less wealth.
Since 2000, stocks have undergone two shocking corrections and houses have risen steadily in price. Mr. Canavan, an investor in several new financial industry start-ups, cautions both millennials and their parents from drawing a lesson that home ownership is the best way to build wealth. "That's just incorrect," he said. "The math doesn't play out."
The average national house price rose about 5.8 per cent annually on average over the past 30 years, which is a great result from an asset that is supposed to merely keep up with inflation. But the Canadian stock market averaged 9 per cent annually over that period with dividends included.
Houses have one big advantage over stocks – you can sell your home tax-free if it's your main residence. You'll pay taxes on the capital gains and dividends your stocks produce, unless you keep them in a tax-free savings account. But there's more to Mr. Canavan's views on housing than just pure numbers.
He sees houses as a responsibility that doesn't mesh well with the lifestyle of the young adult who wants to work hard and build a career. "You don't really have any need to carry around a giant obligation on your back at this age. And that's what a house really is."
Here's the Canavan plan: Graduate in your early 20s and find a place to rent in the city where you work. Be close to public transportation so you have the option of not owning a car. With every paycheque, invest what's left over after you cover necessities in an investment account. "If the money is constantly going into your investment account, it's constantly working for you and you're less likely to blow it on frivolous things."
Target home ownership in your mid- to late-30s, which is what Mr. Canavan himself did. In his younger years, he rented modest apartments in Toronto's Beaches and Yonge and Eglinton neighborhoods. He was married at 35 and bought a house a couple of years later, when he and his spouse had a child. "Because I had invested all the money in equities, we bought our house with cash. I didn't have a mortgage."
Mr. Canavan launched two mutual fund companies early in his career – GT Global and Synergy Asset Management. In both cases, the wealth he built while renting and not owning a home was instrumental.
Our culture places a huge emphasis on home ownership as a sign of achievement and stability, and today's young adults are buying in. In a poll of millennials done early last year, roughly 90 per cent indicated a desire to buy a house or had already bought one. Mr. Canavan concedes that there's a touch and feel to home ownership that appeals to people. "But tying yourself down to that in your 20s? I don't see any logic showing why that's a great decision."
Parental pressure is also a factor in young people buying homes. Many parents of Gen Y kids have done well in the housing market and want the same for their kids. These parents are encouraging, if not pressuring, their kids to buy, and they're providing down payment money to speed the process along. Mr. Canavan suggests young adults thank their parents profusely for the money and then explain that it will be invested for a house purchase later on.
Mr. Canavan's advice is radical because it postpones home buying, and because it puts a level of trust in the stock market that many millennials can't share after watching the stock market crash twice in the past 15 years. But he insists stocks are the better investment – they helped him build wealth in his younger years, and they can work just as well for millennials who are willing to invest aggressively for a decade or longer. "You can build an awful lot of wealth from 22 to 33 years old."
More on the Canavan Plan.