The Bank of Canada has raised interest rates four times already in 2022, and there’s likely another raise or two to come before the end of the year. The response has been almost entirely anxiety-ridden, as people panic about their budgets and portfolios. But if young adults are paying attention, this might be the financial opportunity of their lives.
It can be tough to see the silver lining when you’re being squeezed by endless cost-of-living increases and rapidly rising interest rates on student loans, lines of credit and mortgages. But there is an upside. Not only will these circumstances create one of the greatest lifetime wealth-building opportunities for millennials and Gen Z, it will teach them the money lessons they need to take advantage of it.
The past decade has been marked by historically low interest rates and historically high returns, from both stocks and real estate. Frankly, it’s been hard not to make money. But the financial spoils were enjoyed mostly by Gen Xers and boomers, who had assets to inflate and the income and credit to buy more. Millennials and Gen Z were saddled with high student-loan balances and earning low, early-career salaries. What these younger cohorts needed was the bull market to slow down, or even reverse for a few years, so they could claim some ground. And that’s exactly what’s happening.
While a Gen Xer planning their last few working years or a boomer already in retirement might be anxious at the prospect of lacklustre market returns for a few years, young people have nothing to lose. In fact, they have everything to gain. When you’re looking at a 30- or 40-year investing time horizon, you couldn’t ask for a better opportunity than to buy stocks at a discount for a year or so as you’re plowing cash into your investment account.
Increased interest rates have also begun having their impact on house prices, especially in urban centres such as the Greater Toronto Area. Those who felt priced out of the real estate market over the past two years might start revisiting their dream of home ownership again. It’s true that increased interest rates have hammered affordability in terms of borrowing costs, but if these rates continue, they will significantly lower home prices. TD Economics recently forecast prices nationally may drop as much as 8 per cent, year-over-year, in 2023, which will mean a lower down payment is needed to buy. For anyone who had the income to qualify but not the cash to put down to buy a home, the tide is turning in their favour.
But bear markets and recessions have more to offer young people than low asset prices. The money lessons might prove to be of equal or even greater value. You don’t have much of a choice except to be more prudent with your finances in our current economic climate. Budgeting has become a necessity instead of an option. You have to think longer before making an investment, and run more calculations before taking on debt.
As difficult as it is to adjust to, tough market conditions force people to behave better with their money. And if it goes on for long enough, these practices become habit. For young people, the lessons they learn now can make them better at managing money for the rest of their lives. They’ll be better at assessing risk, better at managing costs and better at recognizing that when things have been too good for too long, it’s likely the moment before it all turns disastrous.
In addition to better budgeting skills, we now understand firsthand the risks of borrowing to invest. We’ve learned the hard way that nothing goes up forever: not the stock market, and not Canadian real estate. Even if you make it out of this relatively unscathed, 2022 revealed your financial vulnerabilities.
Millennials and Gen Z have been served a financial reality check that’s difficult to accept, but they’ll remember it. And if they take this year as an opportunity to critically examine their finances, they’ll be able to find many areas where they can do better going forward. Downturns teach us the importance of a properly allocated portfolio. Recessions show us why we need emergency funds. At the very least, young people have gotten their own war story to tell whenever a boomer starts going on about interest rates in the 1980s.
Market cycles keep us humble, but they are for our own good. And this one couldn’t have come at a better time for millennials and Gen Z.