Because Money Podcast with Rob Carrick
It was a real treat to sit down this week with the 2 Rob(b)s to talk about Generation Y and mindless home buying. Because Money Podcast co-host Robb Engen had a lot of great questions and Rob Carrick had just as many great answers.
The main theme of the show was "Is Generation Y better off buying a place to live or renting?"
To which the answer was: whether you should rent or buy completely depends on your financial situation. The main point I think we tried to drive home was the fact that just because Boomers have found success with home ownership, doesn't mean it is necessarily right for Generation Y. Rob Carrick had a lot of great quoteables from the podcast, here are a couple that I tweeted out live followed by the show transcript.
Jackson: Hey everybody, welcome to another episode of the Because Money podcast. Apparently, I believe this is episode No. 17. We've made it that far.
This week we're joined by a very special guest, Rob Carrick. Rob, it's good to have you here. Thanks for joining us.
Rob: Glad to do it.
Jackson: Yeah, so a bit of housekeeping. Get it out of the way. If you are watching for the first time, the Twitter hashtag is #BecauseMoney. If you've got something to say, contribute, question to ask, let us know. I'll try and get that in. Robb Engen is joining me as a co-host, and unfortunately Sandy Martin can't be here. Which is kind of fitting that we're talking about home ownership and the joys of homeownership, and her house is half demolished and demolished, and I believe she's living in a closet hallway and half a hide a bed in a room with lots of tools and a generator, because her house has no power.
So, we're going to get into it. Wow, I guess this is actually the tale of two Rob(b)s. I actually have to differentiate between you two. Robb Engen, why don't you take it away, and then we'll rock 'n roll. So here we go.
Robb: Thanks Jackson, and thanks Rob for joining us here. We're really excited to talk to you about Gen Y. You seem to have kind of taken up the cause for Gen Y. You know, the job prospects are bleak, and you're not taking that stance that everyone does of "Oh, the next generation. They just need to pull up their socks. And this is how I did it". You know, and they're just a bunch of entitled whiners. You know, the prospects are actually kind of bleak out there. You've talked about that in many articles, and in fact wrote a book called How Not to Move Back in With Your Parents, which is a great read for parents and for Gen Y to get their finances on the right path. So I want to throw it over you and ask about Gen Y. Do they really have it worse off than the generations before them?
Rob: You know, I really think they do have it worse off. I mean, I'm not going to say it's dramatically worse off, but they are. Let me put it this way. Instead of focusing on are they worse, and if they are, by how much, let's just say they have very significant challenges. One is the high cost of tuition. A lot of people are borrowing. The average person who borrows, and it's slightly less than half that do have to go into debt to afford university.
According to latest figures average debt is about $26,000. That's a lot of money to pay off, especially in a job market that is as tight and tough as it is now. We all know about young people who are not finding jobs in their field. They're working at lesser jobs, they're underemployed. It's a tough world to get started in and, you know, you've got to get that good career started, if you want to pay off your student loans and you want to move on in life.
Robb: And saddling yourself, on top at the student debt, that kind of leads us into the whole housing market. So you've made some arguments that we've got these retiring baby boomers and if they hope to unload their houses, well who are they going to unload them on? And with housing prices where they are today, it's not going to that high, is it?
Rob: Well, the way I see it, Gen Y is not positioned very well to pick up the slack in the housing markets. First of all, to get to afford a house in today's market you've have to have your student loans cleared away. Let's emphasize that. Nothing happens until the student loans are paid off. Then you're probably going to have to save for—I don't know. I'm going to throw a wild guess out there—five to seven, maybe ten years to afford not only the down payment, but also the closing costs and the cash reserve you're going to need. I figure Gen Y won't be seriously home buying until their mid-30s to late-30s.
Robb: And what is the typical average first-time homebuyer? What's the age?
Rob: Well you know what, the age was actually declining for a while. I think people were rushing into the market thinking, "I've got to get it because I'll be priced out". But I don't think that can continue. I don't have exact figures, but my sense is it will probably be late 20s or early 30s. Which is more of a traditional age home buying.
Robb: And you've got to think about all the expenses too. You mentioned students paying back their student loans and your student debt. You're probably either buying a car or you've got a car payment at the time. Maybe you're getting married and you've got a wedding and all that to afford. So I mean, there's a lot of expenses at that age. So we talked about how do you prioritize all that, and is it such a bad thing to be renting for a while, while you figure all that out?
Rob: Well the short answer to that question is no, it's not such a bad thing. But you know, I think we have to look at what are the differences between Gen Y and previous generations. In previous generations you couldn't do it all, but you could do a lot of it. So you could have the house and the wedding and the car, and you could juggle all these things. And then when the kids came along you could handle at too.
Today, I don't know if young people are able to carry all these priorities at the same time. So I think if you own a house in today's market, I think you'd have to make that job one. And let everything else slide. You may have to stop saving for retirement. You may need to not own a car. Maybe you want to own a cheap used car instead of buying new.
You have to put all your resources into the downpayment. And then you've got to make sure you can afford the house once you've bough it. I mean, it's one thing to save up for the downpayment and It's quite another to carry the house and all the other expenses over the years.
Robb: Well, and Jackson mentioned, there's a lot of gifts. Parents are gifting the downpayment to the kids. But it's kind of like the gift that keeps on taking when you consider the maintenance costs.
Jackson: Yeah, that's where I'd like to jump in. I'd like to jump in because that's exactly what I see. My experience as a mortgage broker is that the first time homebuyer, if they're in their early mid-20s, they're coming in with mom and dad who are driving them to get into the market, and basically enabling them to buy the house. They're providing the downpayment, sometimes leveraging line a credit against their property, to gift 20%. Just assuming that the equity is going to, you know, appreciation on property's going to drive up, and when their five-year term, they'll just refinance it and then pay off the parents' line of credit.
I've seen a lot of that, and I've seen a lot of people just come into my office and just expect that home ownership is a right. That it's just they have to. I mean, why wouldn't we buy a home. It's stupid to rent. And I kind of struggle with that because you know, honestly, to believe that everyone's situation is going to be the same is ridiculous. If you're coming out at university, you've got high student loans, you're driving the Ford F350, and you've taken a trip to Mexico every year of your life.
Really? Maybe home ownership isn't the best thing for you. But the problem is everyone assumes that it is. You're crazy to tell me not to, and I think that's where I think we're getting into some problems.
Robb: And Rob, is that the fault of the parents and/or that generation? I mean, I'm a pretty avid contributor or reader of your Facebook page, and if there's an older demographic commenting on there and I can see it, and see the trends, it is kind of dumb to rent and throw away your money. Are they passing that kind of mentality on to their kids?
Rob: They are. You know, and I think parents have got to back off in the housing market. They've got to stop filing their kids' heads with this propaganda that houses and investments. Totally a backward-looking proposition. It is a rookie's investing mistake to think your future returns are going to be what your past returns are.
The past three decades were a very special time and that is why the housing market did very well. It's not repeatable in the next 30 years. We had a massive three-decade plunge in interest rates. We will not have that in the next 30 years. We'll probably have a long, slow, steady increase in rates, and that will be negative for the housing market. So don't tell your kids to buy, because housing is an investment. It probably won't be in the next 10, 20, 30 years.
Another point raised by Jackson, people think it's stupid to rent. I'll tell you what's stupid. What's stupid is buying a house you can't really afford. You will be in financial handcuffs, and you'll have to neglect all kinds of other things, quite possibly your retirement savings.
Robb: And when we talk about rent versus buy, there's some behaviour that goes into that as well, right? There's obviously a cost difference. I mean, if your rent costs are less than home ownership. What are you supposed to do with that difference? I mean, it's not for funding your trip to Mexico, is it?
Rob: What you have to do with the difference, and I recognize that human nature will cause people to fall off the track. But ideally, you'll figure out how much more you'd be paying as a homeowner, and you'll save that difference, or invest it. So fill up your TFSA, fill up your RRSP, start a non-registered account if you need to, and invest that money.
That money is a much better investment than a house is. Why? It's liquid. You can sell some of it to pay expenses. You've got a block of money that you can access anytime. A house is really a block of money that you will convert into your next house.
When people sell a house in retirement, it's to buy their condo or their bungalow, and then the next thing they'll be buying their way into the retirement home. You'll never really actually get to use that chunk of money.
Robb: And you talked about what to do with that difference, and invest it in your TFSA. Now you wrote Gen Y's Guide to Saving and Investing is it?
Rob: Right, well a basic how-to for Gen Y, how to get started investing. You know what? Buy very cheap investments. Try the TD e-series of mutual funds, try ETFs. There's a lot of brokers now that let people trade, or at least buy ETFs commission-free. It's a great way to get started.
And you know what, we could talk all night long on whether it's better to rent or buy, and I know the parental generation looks down on renting. We've got to get over that. You know what? I'd much, much rather see people rent and not save, than buy a house and blow their brains out financially.
Robb: And so what do you say to that mentality of renting is throwing away money. Why pay someone else's mortgage?
Rob: Well I mean, it's all about living within your means. I mean a lot of people are not living within their means with houses. And how do we know that? Because their credit card bills are rising and they're not paying off their balance. They're using home equity lines of credits.
There's this image that the homeowner is the smart financial manager and the renter is not, but there's plenty of people who are not managing sensibly with homes. They're not living within their means, and that's why the home equity line of credit has become the must-have housing option. It's a salary supplement for a lot of people, because they're not making it on what they earn.
Jackson: So I've got to jump in here because I'm going through this in my own personal journey right now, where my wife and I, we live on one income. My wife stays home with the kids, and we've always just assumed home ownership was for us. And I've been fortunate to have good jobs. I'm an entrepreneur, and I've been able to make a lot of money. But now as I pull back and I'm trying to be a family man, I'm no longer working 12-16 hour days, six days a week, and I'm trying to find that work/life balance.
And we've made the shift, and we've realized that we live in a two-income Canada. You basically have to have two incomes to drive a standard average house. Now I'm in Regina, Saskatchewan. We've got a relatively good provincial economy and the price of houses are just ridiculously high. Now when I go and compare that to the rental market, I mean I can own my 1600 square foot, three-bedroom house, brand new, or I could rent a two bedroom condo for roughly the same price. And it's really hard, but we've decided to make the shift because we just don't need the space, and we are going to downsize.
Now, of course, we save on property taxes and insurance and stuff, but it's a real big switch, and I think they're the fact you've got this two-income trap developed. What advice do you give to someone who's maybe already trapped in the house and looking to downsize? Because comparable condos and apartments are really not that cheap anymore.
Rob: Well you know what? The problem with renting is that, at least in lot of the big cities, it's hard to find good rental accommodation. And it may not be idea. And you know what I'm seeing, is families are not very comfortable in apartments and in rentals situations. You know, when you have kids you get this nesting instinct and you want to be somewhere that you own. But I think we're going to have to get over that. Even the people that won't, we're going to see more of them in condos, especially in the big cities, because it's the only way you're going to live within the city limits, for a lot of young people, if you go the condo route.
And I think if we do that, we have to accept we're going to be there for a while. You know this idea of this upwardly mobile real estate market, where we buy in, a small little place, and then we move up once or twice. I think that's just wasting money in today's market, and in a flat real estate market if we get that. You're going to build up like a little thin edge of equity, and then you're going to blow it on the cost of selling your house and the cost of buying the next place.
I think we have to think in the long-term. If you're jumping into the housing market, buy a house you can live in for at least 10 years. And if you're buying a condo and you anticipate having a family, ask yourself before you buy, can I live here and raise a kid?
Robb: You know, often the housing bears or the pro-renters today, they talk about it like the whole Canadian market is Toronto and Vancouver. So what do you say to the people on the fringe then, in Atlantic Canada or even here in Lethbridge, Alberta? You know, housing prices are higher, but they're not at the national average. Is that still the case or is it very kind of local as far as this housing?
Rob: Well, the market, every time I write about the "hot" housing market I get emails from people in towns where prices have not gone up, and they're saying, "Stop saying 'Prices are going up everywhere', because they're not". You know what? That's why I try to qualify everything in certain cities, but the market's "hot" and that sort of thing.
One thing about the lesser markets, I mean the markets where housing isn't doing well, tend to be communities where the economy's not doing that well. So really, the prices may not have shot out of sight in these smaller communities, but incomes aren't that good and the job market's not that good, so it's sort of proportional. The hot markets are the hot economies.
Robb: That's what kind of sticks out to me about some of the trends with say for a markets like Toronto, where you know we talk about Gen Y and their job prospects, and salaries haven't budged but home prices have skyrocketed. And when I look at the average income in Toronto, it's actually not that high when you compare it to the Calgarys and Edmontons.
Rob: You know what? Check the income for Vancouver. It's even lower. It's really striking how low it is.
Robb: Yeah, and so I just don't understand how when you look at the income to what their borrowing, those markets are really out of whack.
Rob: You know what, if you look at the average household income in the country, and use the criteria that lenders use. You say, okay what house could you afford, based on the average household income? Nothing. You couldn't buy anything, anywhere.
So basically, the average family, the average household, has always been way priced out of the market, and that would be even more dramatic in Vancouver and in Toronto.
So, the old idea of the husband working, even a blue-collar job. And maybe the wife works, and maybe the wife doesn't work, but they can afford a house. I don't know if that's true anymore in a lot of places in this country, and that's what really worries me about this market.
I think it's becoming a rich man's thing, housing. You have to be well above the average earnings to get into the market.
Robb: So let's circle back here and talk about the graduating students. We're getting to that time right now where students are writing finally exams and looking for jobs coming this spring and this summer. Are the universities and colleges, are we doing enough to prepare students or young adults for this job market, and where do you see that going?
Well you know, let me let me start with the high school process, because I have two sons. One is just graduated a couple years ago, and one who's in grade 11. And I don't think the high schools—at least in Ontario, where I am—are doing a very good job at all. They're not giving kids exposure to all the different options out there—trades college for practical on-the-job experience, universities for the more theoretical.
I also see universities coming up with these catchy curricula to catch kids' attention. I hear about your kids of friend's going off to university and they're taking is these programs. And I'm thinking what is their job connected to that?
You know, I think we have to do a better job of explaining to kids, "Okay, here's the various streams you might want to go into and here are earning prospects, here are job prospects, here's the unemployment rate and the employment rate for each discipline that a lot of kids are looking at. We have to basically say you're making an investment in your university or college education. Here's how it's likely to pay off. I'd like to see a lot more of that.
Robb: Are there a lot a co-op programs happening? I could see that where, you know, at the University I work at they have more for the management and business students, there's co-op programs to pair them with an accounting firm, or whatnot. Is there enough of that going on, and outside of the traditional employers or employment?
Rob: I don't have a clear view on co-ops. I mean, I hear a lot of parents thinking that is a plus in a program for their kids, and I'd have to agree with you on that. I think higher education has to stop being looked at is something that's completely isolated from reality. It's its own virtue to go to university and study. I mean, I think that's great and all.
If you're from a wealthy family who can afford four years to just wool gathering at an undergrad arts program, sure. But for most people, you need to be a lot smarter about what you're doing, and what you're studying and how that's all going to pay off. And I think the universities need to recognize that. We need graduates to be productive members of society, and it's not enough to teach them about the humanities and the arts. We have to give them some skills that they can use to get jobs. And I'm not sure that's happening in a lot of cases.
Robb: What's going on with unpaid internships right now? That was a hot topic for the last couple years. Is it legal? Is it still happening? And should students do it?
Rob: It's finally hit critical mass, the opposition to this. A couple of magazines in Toronto had stopped, and that's they're stopped using unpaid internships. But you know, there's like this martyr complex, "Oh, we were helping young people out, but now all these nasty people say it's wrong, so we'll stop. And these poor young people won't get this great experience of being slaves at our shop".
You know what? I have a real aversion to unpaid internships. I work at the Globe & Mail, and we pay our interns. You know why? Because they're doing work. You know, the unpaid internship, in a world where there's plenty of employment and where you can leave your unpaid internship and have a very good chance of getting a job. Or even getting a job at the place that offering the unpaid internship, I think it's legitimate. But in today's work, it's exploitation and I am totally onside with the intolerance of it.
Robb: And that's where the co-op program comes in nicely, where you can actually pair them while they're in school, hopefully with an employer that can hire them on once they graduated.
Rob: That's right, or you at least to make good contacts and you get good hands on experience. I hear too many internships that really you're not actually doing what your career has trained you to do. But you're thinking it's better than nothing, it's better than sitting at home, better that knocking on doors and having people slamming them in your face. And I totally see why young people do though. It's just I think they deserve better.
Robb: Right. Now you wrote the book, "How not to move back in with your parents", so can you give us some tips on that? So basically, new graduates, they're finding the employment market is pretty bleak. They're $30,000 in debt, or $26,000 in debt. So what do they? They come back home and live in the mom and dad's basement.
Is that a good thing? Should I'm sure mom and dad be helping them out for a couple of years to get him on their feet, and how can you avoid it?
Rob: Let me tell you something, Robb. I've work with the polling firm to flesh out some numbers on Gen Y attitudes, and I've just had a look at the raw numbers. And I am blown away at how much help parents are providing for their kids right up into their early 30s. I mean, there's a big whack of people in their early 30s who are still getting help from their parents to pay the bills. Just to pay basic bills, okay.
We sort of have this idea that it's sort of this novel strange twist that more kids are moving home. In fact, parents are helping out their kids by letting them new home, they're helping them buy houses, as Jackson was talking about. They're helping them pay off their student loans and then they're helping them pay the bills. You know what? There's like this umbilical cord to your kids and it seems to not disappear until they're—I'm going to say—in their mid-30s in some cases.
That's today's reality. I mean, this is what family reality is. And I think we have to accept that something's not quite right in the economy because too many people are not achieving financial independence, like the old days. I graduated in the mid-1980s, got a good job at Canadian Press, the wire service. And I was independent from the moment I started there. I earned plenty of money.
Moving back home? You know what? That's something we're seeing more today because people cannot get the jobs that make them independent.
Robb: And so mom and dad, they want to help out junior, and almost feel bad to say, "No, no, just go strike it out on your own and you'll be fine". So what do you say to mom and dad? Are they putting their own retirement plans on hold?
Rob: You know, I think that's just dramatizing it to say, "Oh but you're going to have to sacrifice your retirement". You know what? There may be a few years where you may have to channel a little money to your kids. But when a kid moves home, what does that mean? Okay maybe they're going to use a little extra hydro, and maybe their showers will cause your water bill to go up, and a few extra groceries you're buying. It's not like you're taking on mortgage payments again. I find that parents "sacrificing their retirement", that just over-dramatizing.
Robb: Well, what about them paying off the student loans?
Rob: Well that's it's quite interesting, because you know what, maybe those are the parents that didn't have RESPs. Now they're just retroactively contributing to the debt repayment.
Robb: So should mom and dad charge their kids rent?
Rob: That's a very good question. I think if you went out and polled 100 parents, you'd get 50 on either side of that. I say no. I say you know what? A kid who moves home is kid who's probably a financial basketcase, and to charge them rent is pointless. I would say instead of paying me, pay the bank, and this quasi-rent money will go into savings for your house downpayment or for your first and last months' rent. Maybe that's a better way.
I've heard of an interesting thing that some parents do. They say they charge their kids rent, but they just put it away. And when the kid finally moves out, they say, "Here's your rent money back". But it was more that they want to instil the financial discipline by having the money paid in the first place.
Robb: Kind of going back to the job prospects and coming out of university. I've kind of believed that a younger generation needs to have a little bit more of an entrepreneurial spirit, or be a little more creative in what they're looking for.
No creative, maybe that means moving away from their home town to better job prospects, or getting outside of that comfort zone, or starting a little business on side, or what have you. Do they have to get a little more creative to make it work in this market?
Rob: I think you're right on there. I think you have to look at every possibility. You know what? I think today's young people are willing to do that. I mean the fact that they're doing all these unpaid internships. I mean, they're willing to work for nothing. Okay, so how much more dedicated could you be to building a career than that?
But I take your point. I do think they need to think about entrepreneurial opportunities. It's better to try and build a business, and maybe not have much of an income, than to be spinning your wheels trying to get a traditional job, and getting absolutely no take-up on that.
So for sure. And as for moving, that's another reason not to buy a house too early. You want to keep some mobility, so that you can move to where the jobs are.
Robb: Yeah, and I find that was one of the mistakes I made early, was I was an early homeowner and probably bit off more than I could chew because I had a roommates kicking in some of the bills. When the roommate moved out, I tried to do it on my own and it's just crippling to your budget when you can't afford to go out for a beer or grab a bite to eat because of your house payments.
Rob: But you know what? That is exactly the reality a lot of today's buyers are getting themselves into. And they may not realize it, but you know the house is just the beginning. As soon as you buy a house, you've got expenses.
Jackson: I'm going to jump in and ask, what do you think? Has the government done a good job or a bad job of helping the housing market? Flaherty, over the last four years has been accused of meddling. Most mortgage brokers would say that, you know, he's gone too far to curb the rising housing market. I personally haven't had a real problem with a lot of the changes he's made. What are your thoughts? Has he too far?
Rob: Well, I mean, I think the government went too far when they allowed the 30, 35, and 40-year mortgages. They allowed CRDC to get into that, and the zero downpayment mortgage.
But government seems to have this idea that it must encourage home ownership, and it must coddle and nurture first time buyers, and provide all these breaks for them. We have government-organized mortgage insurance. You know, and it's like there's this governments mandate to help people own a house. And maybe that's good policy, maybe it's not. We can have another discussion about that.
But I think they went too far in sort of pushing aside good sense, in letting people have these long amortizations rates. And then they got that plus low interest rates, and they realized this market is too hot. And everything they've done since then makes good sense to me.
Frankly, what we all ignore is, if the government really wanted to shut this housing market down, you just raise the downpayment to 10%. That's all you have to do. We have order is restored.
Jackson: Rob, that would kill the… I would lose my job. If governments moved downpayments to 10%, it would be like okay, who can I go and market for because it's not the mortgage industry anymore.
Rob: Well, maybe 7-1/2%, how's that?
Jackson: Yeah, it would still be ugly. Five is pretty.
Robb: So Rob, we're almost out of time, but I wanted to close with—I don't know if it was last year or a couple years ago there was the gentleman who wrote the letter about his economic…
Rob: Oh yeah! I remember him.
Robb: Maybe you can explain it better than I can. He wrote the letter about just kind of how bleak his job prospects were, what he was doing. So maybe tell us about that, and then tell us have you stayed in touch with him?
Rob: I have to an extent. It's an interesting story. He was a young man, like in his late 20s, from Vancouver. He basically had said that everything that I'd been writing about Gen Y was right on, and he was just getting doors slammed in his face everywhere he went, trying to get a job. Anyway, through some of the exchanges I had with them and some other writings, he had a number people try to help him. He did end up having a job offer in Toronto, which didn't work out unfortunately. And now he was in Toronto, tried it out there, met a girl, and now they're moved to Calgary. And I don't know what the latest is on him, but the last I heard he still hadn't sort of hit that job jackpot.
And he was sort of like my quintessential Gen Y situation, you know, because of all the trouble he was having. He found a lot of good temporary jobs, but not the career-building first job that he was really looking for.
Robb: So temporary jobs, like a six-month contract?
Rob: Exactly, exactly. You know what? That's what a lot of young people are getting. They're not getting any benefits, they're not getting any pensions. They're just getting work for a short period of time.
Robb: All the more reason to have that mobility mindset maybe.
Rob: Well that's very true, and not to own a house, so you're not getting stressed out with your mortgage payments.
Robb: Excellent. Well thanks very much for your time Rob. I think we're out of time here, but it was a great chat and we really appreciate having you on here.
Rob: Well I'm glad to do it.
Jackson: Yeah, thanks Rob.
Jackson: Alrighty, well everyone, thank you. We're out of here and we'll check in with Episode 18 next week. Take care everyone in Because Money podcast land.