I read with interest a story recently that suggested a “tsunami of inheritances” could ease the challenges young Canadians face as first-time homebuyers in overheated markets like Toronto and Vancouver.
According to CIBC deputy chief economist Benjamin Tal, some $750 billion could flow to Canadians between the ages of 50 and 75 over the next decade as their parents pass away. Since many people in this age group are supposedly already in good financial shape, this money might be redirected to their cash-strapped kids. As an aside, being cash-strapped when you’re 25 to 35 is nothing new.
I hesitate to believe the “largest intergenerational wealth transfer in Canadian history” will shake out as he expects. How much is $750 billion? Per person in Canada it’s about $21,000, but with wealth concentrated among a small percentage of Canadians, the inheritances won’t be spread evenly. At best, it may be a trend among the top 10 per cent of households in Canada.
What history tells us
But even if such a transfer did take place on a relatively even distribution, it’s likely to do more harm than good. If history has proven anything, it’s that when it becomes easier to buy a home, for any reason, people buy more house, more often. This occurred when two incomes could be combined to qualify for a mortgage, when the minimum down payment was reduced, when amortization periods were lengthened, and of course, whenever mortgage rates dropped.
Initially in these scenarios, those of modest means found themselves for the first time able to own a home. But this surge in demand only serves to further inflate housing prices. And pumping a fresh $75 billion into a market worth only about $500 billion a year would certainly have a huge inflationary impact.
Which is of course the last thing we need. Just last week, Scotiabank said it was easing off mortgage lending in Vancouver and Toronto because of its concerns about inflated and unsustainable market conditions that could come back to haunt it should interest rates increase.
Off course, one bank putting foot to brake pedal isn’t likely to accomplish much. The major banks would have to work in tandem, which would of course be collusion. The tool we need to cool these markets is public policy intervention, but government is hesitant to act when overheated housing markets are such a boost to local economies.
Out of step with reality
Let’s do the math. The housing market in Canada, if you add the values of homes sold and new homes built, is about $500 billion per year. But that number doesn’t include the ecosystem around building, buying or selling a home – the renovations, the fees for contractors, lawyers, realtors, inspectors, appraisers and surveyors. All this activity boosts provincial economies.
According to Tom Davidoff with UBC’s Sauder School of Business, the last thing governments want to do is slow the speed of this gravy train.
The result is increasingly distorted market conditions across Canada and a housing market that’s growing increasingly volatile in terms of its medium-term outlook. But this just can’t continue unabated. Governments must wake up, smell the smoke and realize they can’t afford to keep fanning the flames. Otherwise, young couples will soon have to team up to afford a home, which comes with a minefield of legal implications in the event of relocation for work, death or divorce.
What should younger Canadians do with a windfall?
If a generation of Canadians do come into significant money, their best bet is to pay off debt, be mortgage free sooner by not buying a mansion and bank money against their future needs.
Let’s face it, the days of the rich employer pension packages are long gone for most people and inflation isn’t going away. Thanks to great healthcare, we are living longer in retirement. The worst case scenario is to outlive your money. Even this supposedly well-off cohort of 50 to 75-year-olds may be underestimating the eventual costs of a retirement that’s longer than their working life. Assisted living in a residence is a huge expense, at $5,000 to $8,000 monthly. Worst case is, say you live five years too long and need assisted living. That could set you back $300,000.
Younger boomers and Gen-Xers should prepare for the own retirements, the high costs associated to provide assisted living for their parents, or for having their aging parents live with them. This flow-through of wealth may just be a deposit on future accommodation and care. One of the best lids on housing prices is having the 25 to 35 cohort being really price conscious. Making it easier for all of them to buy a house is not the answer.
As always, how much money you have is often less important than how much you spend. Windfalls of cash invariably do more harm than good.
To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.