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January 5, 2020 | What They Want

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

One of our addicted regulars, a blog dog with no discernible outside life, has argued nobody – ever – should be allowed to take their pension money out of a plan. The logic, simple and flawless: by sucking your share the entire plan becomes less stable. More prone to collapse. Less able to pay everybody.

So true. But these days 70% of people have no munificent pension plan. Many corporate RPPs are mutual-fund garbage. And there’s irrefutable proof the sub-Boomers are headed towards retireageddon. Especially the poor Mills.

Actually many of today’s wrinklies would also be financial toast if real estate had not saved their sorry hippie butts. Born into decades of growth, inflation and asset swelling they saw houses bought in the 70s and 80s and even 90s blossom into capital gains-free retirement plans which papered over their lousy savings habits and hedonistic uber-consumption. (Some of them actually bought AMC Pacers and Pontiac Aztecs, for God’s sake.)

But, we’re done now. Time for Plan B.

Moisters forking out retail prices for homes in 2020 face a stark choice: spend the next few decades paying for their inflated digs, or save for the future. Most won’t do both. And since $1 million houses are not going to $4 million in thirty years, another plan is needed.

Looks like the kids are starting to understand that.

A KPMG poll a few days ago found almost half of Millennials think they’ll never own a home. Two-thirds realize if they do opt for real estate they’ll have no retirement savings. Of those who’ve bought, four in ten worry they paid too much and will end up old and pissy.

No wonder. The debt-to-income ratio among Mill homeowners is a whopping 216%. Job loss, divorce, kids – any shock – can spell disaster when the bank’s got you by the shorts. “What we are seeing is that millennials face a choice today that their parents’ generation didn’t,” says KPMG. “They either buy a home or focus on saving for retirement. Buying a home involves taking on considerable debt because house prices are so high in relation to incomes, and that limits millennials’ ability to save. While most feel home ownership is an investment for financial stability, they worry their home will be worth less in the future.”

So compared to their parents the young adults have more education, delayed family formation, generally higher wages, less savings and face towering house prices/rents plus staggering debt if they buy (in an urban area). Real estate is therefore a gamble, not a financial plan, as it was for their folks. If they pay too much, screwed. If mortgage rates drift higher again, pooched. If life throws in a marriage breakup or a bad job gig, disaster. The safer route is abandoning the dream of a detached in the city, moving to a cheaper place or renting and investing in financial stuff.

But wait. It’s not just the young caught in this trap.

Here’s another survey, this one from a major bank, asking people what their 2020 financial priorities are. Topping the list (again) – tackling debt. No. 2 is trying to pay the monthly bills. In last place (only 8%) is saving/investing for the future, including retirement.

And guess what? Almost 30% of Canadians borrowed more last year – mostly to cover daily expenses, not assets. Now 80% believe it’s a better plan to pay off debt than build up savings. No doubt about it. We’re a debt society. ‘Financial planning’ means ‘debt management.’ ‘Banks’ mean ‘loans’ and ‘mortgages.’ Incomes are for paying bills and making ends meet. Only rich people actually own stuff like portfolios. And they’re old.

How will this change?

It won’t. Not in the next long time. Political actions guarantee there’s no housing crash coming. Perhaps a flatlining or a steady melt. But no 50% drop in asking prices. This means debt will continue to accumulate, retirement savings will be put on hold and personal finances will be just as screwed up – or worse – in ten years when the Mills are nearing their 50s.

This takes us back to pensions. You can be assured public pension reform will be the issue electing a lot of MPs in the next few years. Look at the KPMG poll results. As the real estate option blows up, people are craving government support.

Over 80% say more government benefits/CPP will be needed – since few are saving anything and spending everything. A whopping 90% believe the federal government ‘must do more to protect’ pension plans. Eight in ten say Canada has to overhaul its public and private pension and retirement savings systems, and the quitting age will not be 65 in the future.

Remember the post some days ago about Mills turning into lefties wanting more government in their lives plus the taxes to get it? Bingo. Here it is. The defining issue of the 2020s, as the moisters turn into middle-agers, will be financial security. Not only will they demand government pony up, but they’ll be voting to make it so.

Want to get elected? Promise a universal, decent retirement income.

Got money now? Oh boy. They’re coming for you.

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January 5th, 2020

Posted In: The Greater Fool

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