Two decades of rising home prices across Canada have provided somewhat of a retirement windfall for older Canadians. That’s the good news. The bad news is that home ownership has become increasingly out of reach for younger adults – specifically millennials.
“The aspect of work longer, save more, only goes so far,” says Kurt Rosentreter, senior financial advisor at Manulife Securities Inc. in Toronto.
For financial advisors, counselling millennials about home purchases can be tricky. Along with discussing strategies to get closer to a down payment, advisors need to talk about what is and isn’t realistic – and the broader financial considerations.
The non-profit group Generation Squeeze, which advocates on behalf of young adults, calculated one challenge. Paul Kershaw, the group’s founder and lead researcher, says it now takes 13 years for first-time homebuyers to save for a 20 per cent down payment on an average-priced home. That number increases to 21 years in the Greater Toronto Area and to a whopping 29 years in Metro Vancouver.
To jump-start savings, registered retirement savings plans (RRSPs) offer one option, says Ed Rempel, a financial planner in Toronto. Younger buyers with good incomes might want to arrange a large RRSP loan to cover a number of years of unused contribution room.
Those assets could then be withdrawn from clients’ RRSPs – without having to pay a tax penalty – as part of the Home Buyers’ Plan.
“You could take $35,000 out of each of your RRSPs, so that’s $70,000 as a couple,” Mr. Rempel says.
Weddings can be another potential source. Mr. Rempel suggests taking a page from many cultures that ask for cash as a wedding present rather than gifts. If millennial couples already have a collection of household goods between them, it’s money for their future that they need the most. “That goes a long way toward a down payment.”
Mr. Rosentreter says his discussions with would-be homeowners zero in quickly on possible contributions from parents.
The bank of mom and dad isn’t an option for all, but some parents have the means and desire to help. To assist with a down payment, parents have also found money from unexpected sources.
For example, registered education savings plans may be untapped because a child went directly into the workforce or found other ways to pay for a post-secondary education.
Advisors who work with these generations have different roles to play. When helping millennial clients, it’s about navigating how to manage a parental loan or gift. When helping the parents, it’s counselling them about what’s wise.
“I’m seeing parents at 65, 70, 75 years old sacrificing their retirement to help the kids out,” Mr. Rosentreter says.
Teresa Black Hughes, financial advisor and director at RGF Integrated Wealth Management in Vancouver, says the intergenerational wealth stakes can be high. If there are other children, for example, issues of fairness may arise unless the family intends to support each child similarly.
She also worries that parents can stretch themselves to make their millennial kids’ real estate dreams come true.
For example, Ms. Black Hughes describes the case of clients who are a couple and have three children. They bought a smaller home so that one child could live in their original home in a rent-to-own scheme. At the same time, the parents were supporting another child, who was going through a divorce, financially. Most of this money was coming from their retirement savings.
“At least once a year I said to them, as I would run calculations, ‘You can’t continue to haul this money out,’” she says.
Five years and hundreds of thousands of dollars of savings later, the parents’ comfortable retirement was gone. “It wasn’t extravagant, but it was all there. But they sacrificed it so they could help their children.”
Whatever the source of down-payment money, Ms. Black Hughes says younger buyers should be able to carry the monthly cost of a real estate purchase on their own.
“What can they reasonably save themselves? What can they bring to the table?” she says.
Mr. Rempel also advises millennials to crunch the numbers associated with owning a home. “Just because you qualify for something doesn’t mean that it’s actually smart to do that.”
For him, any real estate purchase for younger clients has to be part of a longer-term financial and investment plan.
Even if clients have managed to save up for a home, Mr. Rempel also talks to them about timing. With housing prices on a seemingly unstoppable climb, panic buying can happen as first-time owners worry about being priced out of their first home.
“People want to get in as quickly as possible, but I have a rule of thumb that it’s not worth owning [a home] if you live in it for less than five years. You can’t even get your money out,” Mr. Rempel says, pointing to land transfer taxes, fees and first-time costs for furniture and renovations.
Mr. Rosentreter, for his part, talks to younger clients about real estate trade-offs, which doesn’t always go over well.
“I have frank discussions about, ‘How far are you prepared to commute?’ or ‘Can you live in a different city?’ and they look at me like I have three heads,” he says.
He also talks about lifestyle trade-offs. If clients can scrape up enough for that monster mortgage, will they have enough left for family, vacations, cars and other needs and wants?
These discussions can help millennials decide if they should let go of the dream of home ownership.
“As a young person, will I think about planning for my future by having a really good financial portfolio and keeping my debt levels low? Or am I going to go into home ownership, which is really going to leverage me into one asset class?” Mr. Kershaw says.
There is no single answer. So, it’s even more important for advisors to help millennials determine if the prudent path to financial security involves real estate.