Part 1 - In depth: How low home ownership rates are turning millennials into "snowflakes"
July 22, 2019
Erik Fertsman
Over the last few years, it's become increasingly clear why many millennials are behaving differently than some of their peers and other generations: financial inequality, not income inequality, may be at the root of the problem. In other words, it's not how much you earn, it's how much money you have and can squeeze out of your assets. And for millennials, it's only getting worse with rising home prices...
Over the last six months, I've been investigating why millennials are experiencing significant economic variation within their own ranks and between older generations. This may have something to do with the preconceived notions that millennials are "snowflakes," lazy, unproductive, or some other negative connotation associated with performance in life.
While I keep asking myself what group of young people weren't
lazy, it's hard to find a moment in the past where older generations carried similar assumptions about their younger peers. Millennials are anecdotally known to be preoccupied with “experiences” rather than focusing on building wealth, like their parents, through various assets such as pensions, real estate, businesses, and financial products.
Is this why older generations are upset with millennials? Because millennials don't have enough saved or enough assets to sell that would help them with their living expenses? Maybe millennials should stop spending money on expensive trips!
On a more serious note, millennials are now the largest cohort in Canada, coming in at above 27 percent of the total population. They're also the most educated workforce the country has seen to date. So, why are they acting differently? And, does this have something to do with wages and asset prices (like homes)? Perhaps they simply can't
afford to buy all the things older generations currently have or own at inflated prices.
What Equifax had to say about millennials as consumers
Last year, Equifax
did a generational study looking into the personal finances of Canadians. They found that credit scores for young adults (age 18 to 24) were, on average, 681 ten years ago. Fast forward ten years, and this same age group now has an average score of 692, which is slightly better.
This information is interesting because, when it came out back in 2018, all the other age groups (Equifax identified six in total) showed a deterioration in credit ratings. The findings didn’t prompt Equifax analysts to celebrate, they wrote:
Financial optimism abounds within the broader group of Millennials (18-34) of which 82 per cent say they are optimistic about their financial future versus 73 per cent of the general population. Of concern, however, 27 per cent of Canadians aged 45-54 say they are not able to save on a monthly basis. Likewise, 35 per cent of Canadians say they make just enough to cover their expenses and 17 percent say they can’t cover their expenses. It’s even worse for the youngest of the Millennials (18-24), 34 per cent of whom say they can’t cover their expenses.
This sentiment is echoed somewhat by older Millennials (25-34), as 45 per cent think their standard of living is worse compared to their parents (at the same age) and more than half of younger Millennials (18-24) don’t feel they have enough information to make financial decisions (54 per cent).
So, over 1/3 of young millennials can't cover their expenses, and almost half of older millennials are living below the standard of living that their parents had at the same age. Yikes. But they've got better credit scores! There's just one problem with that: you can't buy anything with your credit score...
Here's another tidbit of information: Equifax added-in how total consumer debt had exceeded $1.864 trillion, and that mortgage debt continued to grow at a substantial pace with mortgage volumes primarily driven by the oldest age group (65+). This age group alone accounted for 59 percent of total mortgage trade and 91 percent of total mortgage balances between 2013 and 2018!
Ok, now we're getting at something: millennials may be struggling because many of them are not sitting on homes with mortgages. There seems to be a correlation between home ownership and financial well-being.
What about all that education, low unemployment, higher wages, and easy money?
One would not be mistaken for thinking that post-2008 policy and economic conditions, along with historically-low interest rates, would and could be linked to prosperity outcomes for millennials. Especially considering that the cost to borrow is very close to zero, and everyone is educated to the nines due to widespread access to government and private education credit. A simple calculation could lead one to believe that easier financial conditions should be linked with financial or economic well-being.
Much of this young cohort has been out of school for some time - albeit with some student debt (sums that probably running higher than that of their parents) - have entered the workforce (at higher pay rates), and are buying homes (at higher valuations). From this perspective, one would expect to find that millennials are inherently “dressed for success” through the fruits of cheap credit, widely available education credit, low unemployment, and high wages, right?
It's true that millennials in the US have lower wages and have amassed fewer assets than what their parents had at the same time in their lives. This is often assumed to be the result of the 2008 financial crisis, and the weak labor and credit market conditions that quickly followed. However, Canada didn’t really experience 2008 like the US and other countries did.
Our housing markets stayed strong, and none of the banks fell apart. There was no
credit tightening (or normalization), nor did Canada charge its students $25,000 to $100,000 for annual university tuition. Moreover, there's no high unemployment levels comparable to those found in southern Europe. Does any of this really matter? Equifax's report clearly indicates a correlation between home ownership and financial well-being.
What the Canadian Housing Statistics Program says about millennials and home ownership
Statistics Canada's
Canadian Housing Statistics Program confirms this discrepancy in home ownership between millennials and other generations. Take a look at the chart below, which has data for Nova Scotia, Ontario, and British Columbia. These three regions were chosen because they're quite physically distant from one another.
Older millennials own considerably less property than their older peers, and when you take a look at younger millennials, it's even lower. Granted, the trend in Canada to buy a home is after the age of 30. Those born between 1990 and 1999 are just at the cusp of this period in their lives, with the youngest still a decade away or more from considering home ownership.
There's another way of looking at things though - by age distribution of the population and property ownership. Here's the data for Nova Scotia below:
The information here is a bit more profound. Even though millennials constitute the largest share of the population aged 18 and over, they hold the smallest share of residential property ownership. Why does this matter? Take a moment to remember what Equifax said about property ownership and economic well-being.
If you still don't believe, take a look at how debt-to-asset ratios really make a difference on financial distress. All things being more or less equal, as one might expect when it comes to consumption (we all need food, clothes, a place to live, and so on), if millennials don't have a comparable share of property ownership, they are not financially gaining from home asset price inflation like everyone else.
Home ownership can greatly increase real and potential wealth. Rising home prices, more often than not, leads to profits either through selling a home or by downsizing. It's like doing well in the stock market, or winning a sizeable lottery ticket. Wealth can also be "extracted" by getting something like a "reverse mortgage," where one borrows against the value of their home.
This money can be converted into real spending power that adds to one's standard of living/economic well-being. Folks approaching retirement do this all the time. This is one reason why home equity lines of credit, or HELOCs, have become so popular in Canada. People are tapping into their home like they're ATMs.
You can see how we're facing a situation where millennials - Canada's largest group of people - need
to enter the home ownership game as part of a strategy to achieve financial well-being. Here's the kicker, though: homes have experienced significant asset price inflation over the last 20 years, and for the past two they've kind of just lingered sideways:
Can millennials even afford to buy anything in this market? Just a few days ago, I wrote
about how Bloomberg economists are putting together a "bubble dashboard" for the Canadian housing market. These folks don't do these kinds of things for economies that are hunky dory, as it were.
With 35.8 percent of the population only taking up 11.7 percent of residential property ownership, only two things are possible: either millennials actually can't afford to buy a house, or they're about to buy into this thing that the entire world is watching, with their eyes peeled, without even really
thinking about it. Either way, they'll probably need to keep getting help from their parents.
Stay tuned for part two of this article on why low home ownership rates are turning millennials into snowflakes. In the next article, I bust the myth about millennials earning good wages, and blow the door open on the severity of financial inequality among millennials and other generations. The numbers are truly crazy..
Cover image source: AbsolutVision
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