For the young Millennials who have successfully started their careers the single biggest advantage that they have for building wealth over any other generation is time. Yes, it’s time. Unless someone inherits a large swath of cash, or ends up finding a large windfall under their mattress, time is the only thing that will help the young generation build wealth. There are no get rich quick schemes, there are no magic investments. It takes time. Time matters because compound interest is exponential in growth. The more time you have the more wealth you will build, but that’s only if you start early.
It’s unfortunate that many young individuals in Canada have taken the wrong turn to their financial wealth building. Rather than realize that time is what they have, Millennials want it now and they want to get rich quick. For many, that means highly leveraging their money and jumping in on the red hot housing market in Canada’s big cities. The myth still exists that housing is a no risk investment, but many people just don’t realize just how much risk is involved when trying to chase gains in a highly leveraged housing market.
Big Fat Debt
The real question is just how leveraged are these people? People believe that the red hot housing market is due to foreign investment and that every house is paid off in cash by oversea investors. There might be a small percentage of all buyers that fall into that category, but that fact still doesn’t discredit the fact that time young buyers are still jumping in on the market.
Just what is the chart showing? It’s saying that many people are borrowing a lot of money to buy homes. Most home owners are putting as little as 5% down just to buy a house and overall home equity is in the single digits of only 8%. Almost 92% of all home buyers have greater than 85% of the value of their homes as loans. This represents a huge risk. Most people have leveraged their money 20 to 1 in order to buy a home. This is all fine and dandy so long as we continue to push home prices higher, but the scary fact remains that so many people are in so much debt at a time when interest rates cannot go any lower.
So rather than being financially flexible and building a diversified portfolio, people have run in droves to buy homes using borrowed money. The potential for better job opportunities in other cities or countries have been forgone just so they can avoid “paying someone else’s mortgage”.
The Debt Sentence
If you think that most houses are already paid for, guess again. Of outstanding loans, the average remaining years left to pay is around 18 years. That’s still eighteen working years of paying off massive loans that homeowners have accrued during the housing run up.
This is almost like sentencing yourself to 18 years of slavery to your home with no bail before then. Homeowners are willing to forgo financial freedom for almost two full decades just to own homes that quite frankly have gotten unaffordable based on current salary rates.
When an individual leverages to such extent to buy a home, the likelihood of being able to pay off such a large sum very quickly is slim. This is why making a home purchase too early in life can be very restrictive for saving for the future and getting ahead of the game. Rather than collecting interest and actually generating a positive cash flow with money saved, money is constantly fed to the banks who are collecting interest on the mortgage loans. Did anyone just read this week that the big Canadian banks just made $35B in profits this year?
Cash Flow First
I’ve always written about how important cash flow is. It’s not about what you own or even how much wealth you have stored away under the mattress. It’s about generating a positive cash flow that meets the needs of our lifestyle. Incurring huge debt and restricting financial mobility hinders that very principle.
Buying a house too early and over leveraging with a large mortgage is a recipe for disaster. The need to service the mortgage payments means it leaves little for anything else. As young individuals, it’s important to stay flexible. There are many opportunities out there that may require mobility in both finances and location. There is nothing worse than having your capital tied up in something that is both immobile and illiquid.
In staying with the theme of this blog. It’s always important to put balance and diversity above all else. Owning a home has always provided a great sense of pride and accomplishment, but don’t make it your only financial goal. Be sure to keep your assets balanced across all facets of investments, whether it be real estate, stocks, bonds or even just plain cash.