The Great Canadian Wealth Transfer: Boom or Bust for Millennials?
Baby boomers have long been considered Canada's financial powerhouses. They own a staggering 41% of all homes in the country, and their retirement looms large on the horizon. A popular theory suggests a coming "great wealth transfer," with millennials – currently comprising 23% of the population (boosted by immigration) – set to inherit a windfall. However, this rosy picture might be clouded by some significant risks.
Risk 1: The High Cost of Aging
Living a long life comes at a price. Boomers may need to tap into their home equity to cover property maintenance and upkeep as they age. Additionally, the desire to age in place often necessitates private home care, a significant financial burden. Eventually, many boomers may transition to elder care facilities, further draining their resources.
Risk 2: The Squeeze on Social Services
Successive governments haven't fully addressed the looming strain on healthcare and pension systems. These systems rely on a healthy ratio of working-age Canadians to retirees. If the burden becomes too great, the government might increase taxes on wealthy boomers to fund social services for less fortunate seniors, leaving less money for inheritance.
Risk 3: A Housing Market Correction?
As boomers downsize or pass away, their single-detached homes will hit the market. This influx of supply could create a surplus, exceeding what the market can absorb at current prices. A report by the Research Institute for Housing America suggests that excess supply is already impacting the market. However, they assume that so long as market conditions remain the same as before the pandemic, it shouldn’t impact prices.
However, since the pandemic, most analysts agree that average mortgage rates will be higher for the foreseeable future. Higher borrowing costs mean people can access less home purchase financing than before the pandemic, resulting in a smaller average homebuying budget.
Risk 4: The Millennial Mortgage Crunch
Even if housing prices dip, affordability might remain a challenge for millennials. Many millennials who have begun climbing the “property ladder” are struggling with higher mortgage rates.
It is more challenging for them to save for retirement and the next step on the property ladder and many are falling behind on debt repayment.
Banks are helping millennials experiencing the strain of too much debt by extending the duration of their mortgages. This is sometimes called “negative amortization” — essentially, mortgages that were expected to be repaid in 25 or 30 years will now take 40 to 50 years to repay.
A depressed housing market might not translate into a buying spree for this generation.
The Road Ahead
The "great wealth transfer" may not be the guaranteed bonanza some anticipate. Addressing these potential roadblocks requires a multi-pronged approach. Federal and provincial governments need to shore up social security systems to ensure boomers have a secure retirement without draining their estates. Initiatives encouraging alternative housing options for seniors could free up single-detached homes for younger buyers. Finally, millennials hoping for the dream home when the wealth transfer happens might be disappointed to know that they might be waiting another ten to twenty years. By then, their children will be adults, and the allure of a single detached home with a backyard might have lost its lustre.
Younger generations need to own their future prosperity by electing governments that will tackle the structural issues with social security. The current solution, being pursued by the federal government, is to boost immigration to build up the bottom of the population pyramid so working Canadians pay for unfunded benefits to older Canadians. While that might work in the short run, with Canada’s low natural population growth, we will face the same structural problems over and over again.
The future of wealth transfer in Canada remains uncertain. Careful planning and proactive measures by younger generations and policymakers can help ensure a smoother transition and a more equitable distribution of resources across generations.
