Tuesday, February 4, 2014

Frugal or Feudal? Taper terrors and the costs that bind us

For many in my generation, and the up and coming generations, home ownership is a dream that is perpetually getting further and further out of reach even for those making decent currency. The baby boomer generation, along with foreign speculators, eyeing "profits", "pensions" and "home equity" the entire way has in exchange for their perceived wealth ensured their descendants live a life of uncertainty and servitude. There is a clear cut off line: those who pay less today for more, and those who will be paying more for less. The government has symbolically defined this line as those who will now be eligible for OAS at 67, instead of 65.

But this line defines much more than just when you will be eligible for OAS, it defines a whole new class of people that are plagued by low interest rates and can't save a penny due to the supposed need for more inflation. It defines a class of person that between student loans and mortgages are leveraged up to their eyeballs before you even consider the impossible task of trying to estimate how badly central banks will have devalued their savings and investments before a retirement which already many are grouping into the "dream" of home ownership.

Baby boomers who have benefited from their speculated self-fulfilled profit prophecy of house flipping and money for nothing now have some advice for the generation priced out of the market: you'll just have to rent.
If Canadians have a preoccupation these days, apart from the winter weather, it seems to be real estate. Specifically: the ever-rising prices in most of our big cities.

Is this a bubble? Will there be a crash, or a so-called soft landing? No one really knows.

For generations, we've cultivated the home-ownership dream — the idea that rising house prices are a measure of the country's overall prosperity and one's own financial security.

Buying a home is what you do as an adult — it is how you settle down and raise a family.

It's also a good investment, and often a ticket to a secure retirement. Social pressure, government policy and, recently, historically low interest rates have encouraged all of that.

But maybe those are now outdated notions. Many young Canadians are already looking at them with skepticism. And perhaps we should all rethink the dream for a number of reasons.

First, affordability. In little more than a decade and a half, the average house price in Canada has more than doubled, outpacing inflation and incomes.

In Toronto's super-heated condo market, for example, what's called a micro-condo — 300 square feet — can go for a cool quarter of a million dollars.

Realistically, for the average Canadian, the dream of owning a home is beyond reach in cities like Toronto, Vancouver and Calgary.

Some Canadians are spending as much as 50 per cent of their income on mortgage payments, and as consumers we've never been more indebted. Mortgage debt is a big part of that.
And so it begins: the decent into modern feudalism. "Sorry Gen-Y that we priced you out of the market, you're just going to have to put your stagnant incomes into rent payments to us". Gee! Thanks baby-boomers!

Gen Y’s biggest financial decision: Buy a home or save for retirement
Gen Y, you need to choose: Get a good start on retirement saving, or buy a house.

A lot of 20- and 30-somethings can’t have both. They need to accept it, and start thinking about what really matters to them as a financial goal.

Home ownership vs. retirement saving: Now, there’s a topic you don’t hear talked about much in registered retirement savings season. Maybe it’s because the people selling investments and advice for retirement also make a lot of money from mortgages. It’s in their interest to keep up the fiction that it’s no problem to do it all.
Yea, that's right Gen-Y: home ownership or retirement, your choice. Of course without the home ownership portion your success at "retirement" is going to depend heavily on what unknown amount will be charged for rent in our speculation inflation Ponzi-conomy. What ever amount you think you're going to need, quadruple it and maybe you'll have enough. Maybe.

As the author in the first article says "And perhaps we should all rethink the dream for a number of reasons.", but we shouldn't just be rethinking the dream of home ownership or retirement we should be rethinking the dream that is our economy. We should be rethinking the incredibly lopsided debt burden being placed on future generations as we rush to plunder the resources they will need to pay it off. We should be rethinking the very concept of "wealth" and "first world" to account for the hardships our instant gratification culture will be imposing. If home ownership isn't affordable, then neither is retirement, and both of these are fundamental values associated with the "wealth" of the "first world".

There is no more middle class, there is just a class of people with alright credit that continue to believe they are middle class and can afford middle class items because of cheap loans and credit. If many in the supposed "middle class" actually had to live within there means as in only paying for things with the currency and wealth they currently own (as I do) they would likely find themselves in the "lower middle class".

It's time those who have benefited from the wealth of their descendants pay it back. If we won't do away with our Ponzi-conomy entirely then at the very least it's time to raise interest rates, allow the significant housing correction that everyone knows needs to happen, and for the first time in their lives allow an entire generation to actually save and earn interest on their savings. OAS needs to be returned to 65 ,and current recipients need to receive less if there isn't enough currency to support them. It is time we stopped stealing wealth from the future to pay for the a present we collectively can not afford and it's time for those benefiting from this time travelling wealth transfer to take a haircut.

Of course, for Canada to do that it would have to admit to Canadians that the entire "recovery" has been a lie fuelled by cheap currency, "consumer spending", and housing bubbles.

UPDATE 1-IMF sees limited room for Bank of Canada rate cut
Feb 3 (Reuters) - The International Monetary Fund (IMF) said Monday Canada's central bank is likely to hold its main interest rate steady until early 2015, and the bank has limited room to cut rates because of overvalued housing prices and record household debt.

After consultations with Canadian officials on the state of the economy, completed in late January, the IMF concluded the Canadian economy will pick up speed in 2014 as exports get a lift from stronger U.S. growth.

It highlighted concerns that growth remains too reliant on consumer spending and homebuilding, but it sees exports and business investment gradually taking over as the main drivers of growth over the next couple of years.

"Monetary policy should remain accommodative until there are firmer signs that growth is picking up above potential, with a sustainable transition from household spending to exports and business investment," the Washington, D.C.-based lender said in its report.
Of course the U.S. "growth" we're relying on was completely fuelled by the Federal Reserve's easy currency too which is tanking now that the easy currency is drying up. The DOW has already lost 1000 points since tapering began which "coincidently" marked it's peak. The IMF is pointing to exactly the conundrum I've been saying Canada would be facing. We're already feeling the inflationary pressures of not reversing our interest rates - just the other day at the grocery store I noticed many food items marked up significantly from previous months - and so are other nations.

The unaffordability faced by the new "low-wealth" generation is causing new trends to emerge as "millennials" move back in with their parents; trends which will further hamper attempts by the easy-currency kingpins to keep the house of economic cards standing: multi-generational homes.
The Urban Green Cohousing Society — formed in 2009 — has already put a down payment of $270,000 on three properties and is in the process of acquiring a fourth at 101st Street and 88th Avenue. The six member households who invested contributed what they could, between $30,000 and $75,000, said member Carolyn Nutter.

She said they are hoping to break ground in 2016, though the plan is still in preliminary stages and no design has been rendered.

The idea is to construct an apartment building of three to four storeys that contains 25 private units. The units would likely range in size from one-bedroom to three-bedrooms and there would be about 4,000 square feet of common area.

The co-housing movement, which was first established in Denmark in the 1960s and spread to North America in the 1980s, emphasizes intergenerational living in which each household owns its own private suite, but is part of a planned community that shares common resources and space. For instance, the community may decide to share a play room, workshop, common room with kitchen, guest rooms or an exercise room. Units tend to be smaller than normal because of the communal space and all owners must be members of the society.

For Steve Grubich, 43, who grew up in a suburb of Windsor, Ont. and later lived in a suburb of Edmonton, developing a sense of community appeals to him because he didn’t experience it in those places.
Ironically our hyper-speculated consumption based culture may actually be driving people away from that style of living towards a longer-term low-consumption community based model. Or at least for some people who's families collectively recognize their responsibility and culprit-ability of their contributions to the current situation leaving some Gen-Y's with the option to not live feudally, but rather frugally.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

1 comment:

  1. In modern life person find more and more costs. The life becomes more expensive and people try to find place where to take money. Everyone has his own way of taking them. Someone borrow money from relatives, other take loans. I often take advance payday loan because it’s simple and convenient way of taking money. I remember that 2 years ago I saved up and bought necessary things when today it’s impossible for me to make savings and sometimes I can’t buy things which I need. It means that the costs became larger.