Millennials: The Generation of Renters

Here is a quick exercise for all millennials. Think of your 5 closest friends and see if any of them own any real estate. A Canadian study done by KPMG revealed that 46% of Canadian millennials (individuals aged 25-40) believe that homeownership in the near future is a pipe dream. For those millennials who have been able to buy a house, was it made possible with parental or spousal support? If you are one of the few who have purchased real estate independently, I can only tip my cap to you.

The millennial generation is in a unique position, as we live in a subscription-based society: we own zero assets, yet pay a monthly "subscription" in order to reap the benefits we get out of an asset. One of the most important subscriptions we are bound to is rental payments. This article will go over the difficulty of homeownership while explaining the rationale behind renting. In addition, it will be explained how the intangible value of homeownership and the benefits of leveraging equity will refute the idea that millennials should be lifetime renters.

Difficulty of Home Ownership

Owning a property is easier said than done, as it is not an overnight lifestyle change. The first hurdle of home ownership is being pre-approved for a mortgage. The issue is not the ability of getting approved; it is for how much you actually get approved for. Qualifying for a substantial mortgage is being hindered by stagnant salary increases and meteoric real estate prices. Let's use a 1 bed Toronto condo as the basis for this argument. According to listing.ca, the average 1 bedroom condo is roughly $607,000. The mortgage affordability calculator on Ratehub.ca shows that, if 20% can be paid down, an individual must have an annual income of $97,000 in order to qualify for this mortgage.

Queue the second hurdle: the down payment. On a $607,000 condo, a 20% down payment equates to $121,400. How many millennials have liquid assets totaling a 20% down payment? Even if you had this amount of money, how many of us are prepared to allocate this percentage of savings into one investment? On top of this, there are additional closing costs to consider: land transfer tax ($17,000) and legal fees ($1,000). Fortunately, first-time home buyers receive a $8,475 rebate on land transfer tax. That being said, total closing costs on a 1 bedroom condo exceed $130,000. Considering that Canadian millennials have a median net worth of $51,400, there is still a substantial financial gap to enter the market.

Rationale Behind Renting

I sympathize with millennials who have yet to overcome the financial hurdles that come with owning property. It is this same reason that I understand the rationale behind renting. Renting has made sense for millennials who began renting since graduating from university. Tenants who have renewed their yearly lease can thank the Ontario government for capping rent increases. Since 2006, the highest allowable rent increase was 3.1% in 2012. On the other hand, there is no capped increase in the resale market, which has resulted in mortgage payments to dwarf monthly rent.

Using the average price of a 1 bedroom condo, a mortgage rate of 1.99% amortized over 25 years equates to a monthly payment of $2,054. Considering that Toronto condo maintenance average out to $0.64/Sqft, your 550 square foot condo incurs monthly maintenance fees of $352, for a grand total of $2,406/month. According to Canada's recent rent report, the average rental price for 1 bedroom condos was $1,773. A difference of this amount is a justifiable reason to continue life as a renter.

Pride of Home Ownership

Although the rationale of renting can be justified, there is one intangible value associated with buying property: the pride of home ownership. It is an intangible value that cannot be quantified; however, the importance of it cannot be overstated. When it comes to basic goals that every young adult looks to achieve in their life, it consists of finding a partner, getting married, starting a family, and owning a home together. The process of home ownership is an environment which millennials have grown up in. The thought of our generation never owning a home is a frightening thought and one that we may have difficulty adjusting to.

Millennials have been conditioned to believe that home ownership is now beyond our means. There is a constant battle between keeping a steady budget and saving for the future. The optics of owning a house similar to our parents appear to be unrealistic and unattainable, but as is the case with all investments, there must be a long-term mindset associated with this goal. Ask any of your parents how they ended up in their current house. In most cases, purchasing property was not a one-and-done ordeal. A study done by the Canadian Association of Accredited Mortgage Professionals (CAAMP) showed that the average Canadian will own about 5 homes in their lifetime.

Leveraging Your Equity

One of the most valuable aspects of owning a home is that it provides the opportunity to build equity. A lifetime renter will only ever incur expenses by renting on a monthly basis, as opposed to paying off a mortgage and simultaneously building equity. This especially bodes well for a homeowner, as it provides the means to leverage this equity in obtaining a home equity line of credit (HELOC). It also allows you to pull out your equity through refinancing your mortgage.

Accessibility to capital is feasible if you can leverage your equity from an appreciating asset. This additional capital is what allows an individual to further grow one's overall investment portfolio. The CAAMP study indicated that, for repeat buyers, equity was a major source of their down payment funds. In fact, buyers financed 67% of their purchase via mortgages and home equity line of credits. As mentioned in my last article, "The Three I's of Real Estate," inflation, immigration, and input costs are all factors that point to real estate being an appreciating asset.

Final Thoughts

Where do millennials go from here? Will we be the first generation to break the cycle of asset ownership? This piece was not written to pressure the millennial generation to immediately start buying houses. As a 25-year old, I understand the difficulties that come with financing a real estate purchase. The path to home ownership is one that will take time. That being said, a financial plan needs to be put in motion with the intention of accumulating enough savings to enter the market. If not, the millennial generation could fall victim to the subscription-based lifestyle for years to come.