How millennials, gen Z can build wealth without real estate #CanadaFinance

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Kristy Shen, who is in her early 40s, has never bought a home and doesn’t plan to (unless you count her shares in real estate investment trusts).

But when she was in her late twenties and working in the tech sector, Shen felt the pressure to become a homeowner, too.

“I was actually trying to buy a house, just like everybody else in Toronto,” Shen acknowledged. “Back (in 2015), it was already getting to the point where people couldn’t afford to buy. The average single-family (detached) home (in the city) was near $1 million.”

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Still, after the 2008 financial crisis, Shen no longer felt like she had the same job security and was concerned about losing her position due to outsourcing. She said her goals changed drastically after a coworker at her job collapsed at his desk and underwent emergency surgery after overworking himself.

Shen decided she didn’t want to continue working until she was 65 just so that she could pay off a massive mortgage, and sought financial independence instead.

“Instead of taking the money that I saved to put a down payment towards a house, I put it into a portfolio and bought index funds, instead. And then that portfolio grew over time,” she said.

When she was 32, Shen and her husband managed to retire with $1 million in savings and started travelling the world.

The math on home ownership doesn’t make sense

Shen, who grew up in poverty in China, said she took an engineering degree just because she thought it would bring her financial stability.

“I did the math to figure out whether this was actually the correct career and it was a good return on investment,” she said, recalling that her father once told her that if she followed her dreams of becoming a writer, he couldn’t financially support her if things didn’t work out.

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The math on homeownership did not make sense for her, however, and doesn’t for many other young Canadians today. The underlying issues have much less to do with avocado toast (the stereotypical critique of younger generations unable to save because they spend on luxuries) and much more to do with increasing housing unaffordability.

“I think that we need to write a new rule book, because the rule book is coming from our parents who actually were able to afford houses that were only two to three times their annual salary,” Shen said. “And now my peers and the next generation are trying to buy a house that’s 20 times their annual salary. It doesn’t make sense.”

Jason Heath, managing director and certified financial planner at Objective Financial Partners Inc., pointed to the rapidly rising cost of real estate compared with slower income growth as a major impediment preventing younger generations from building wealth the way their parents did.

“I think there’s been too much of an emphasis on real estate and that being the only path for people to accumulate financial wealth, perhaps at the expense of other options, like investing in the stock market,” Heath said. “If you were to look at (the S&P 500 index’s returns) over the course of the last 10 years, it’s generated about a 13 per cent annual rate of return — much higher, frankly, than real estate prices have appreciated in most parts of Canada.”

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According to the Canadian Real Estate Association, the benchmark home price has climbed from $399,000 in September 2014 to $713,200 in September 2024. Crunching the numbers translates to a 6.3 per cent average annual increase.

However, it is important to note that in the past year, home prices have declined by 3.3 per cent.

“Even though real estate has done relatively well over the last generation in Canada, I think it’s super important that people don’t put all of their eggs into that basket,” Heath warned.

“We tend to suffer from a recency bias, where just because something has done well recently, we anticipate or expect that it will (do well) going forward. And I’m in the camp where I think the next 25 years may be very different.”

Can a renter generate the same wealth as a homeowner via investing?

It is possible for someone to become a wealthy renter today, Heath believes, noting that renting is typically cheaper compared with paying off a mortgage.

“I don’t think that real estate is necessarily the only path to become wealthy.”

He said a renter could potentially build the same kind of wealth that someone could generate through homeownership in an ideal scenario where a person who has extra cash invests their savings into the stock market.

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“A disciplined renter, especially if they were investing in stocks and a low-cost portfolio and they were taking advantage of tax-sheltered accounts — could they be in the same position (as a homeowner) years from now? I think they could be.”

Tsur Somerville, who holds a real estate finance professorship at the University of British Columbia’s Sauder School of Business, published a study in 2007 that compared wealth accumulation between homeowners and renters.

One of the key findings that still holds true today is that homeowners benefit from the “forced savings” aspect of making monthly payments on a mortgage, which allows them to build equity, Somerville said. It is much harder for renters to set extra funds aside and invest them on their own.

The report concluded that for renters to accumulate the same amount of wealth as homeowners, they needed to be “extremely diligent savers, invest in a high yield instrument, do so with minimal fees, and have the good fortune to live in one of the cities where the right combination of low rents and/or low house price growth allows them to invest more in a relatively higher return asset.”

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For example, in the “best-case” scenario — which required renters to invest 100 per cent of the difference between owner and renter payments in the Toronto Stock Exchange and pay very low investment management fees — renters in Edmonton, Halifax, Montreal and Regina could accumulate 20 per cent more wealth than homebuyers.

However, the report found investment-savvy renters in Calgary and Toronto could not match the wealth gains of homeowners due to expensive rental rates in the former and rapidly rising home prices in the latter.

Can the average millennial or younger Canadian afford to invest?

Shen and her husband, who worked in high-paying tech jobs, had already saved about half a million dollars by 2012. Shen said her scarcity mindset meant she tried to be as thrifty as possible, taking public transportation and cooking at home instead of eating out.

However, the couple’s fixed expenses have been relatively low as well. They rented the second floor of a townhouse in Greektown in Toronto for about a decade at about $850 a month. During the COVID-19 pandemic, rent prices dipped and they found a place in a rent-controlled building in Toronto for $1,576 a month.

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For other working young adults who live with their parents and pay little to no rent, it makes sense for them to start investing early and benefit from compounding rates of return. The most recent census data from 2021 shows more than 35 per cent of Canadians aged 20 to 34 were living with at least one parent.

The solution is not so simple for people who rent and do not receive financial assistance from their family, or who don’t work in high-paying jobs. The renting and investing scenario is contingent on whether the renter has the excess cash to invest in the first place, Somerville noted.

“A lot of renters are lower income, and therefore their ability to accumulate wealth is compromised by their lower income, not by the fact that they’re renters,” he said, adding that rent prices have escalated in the past three to four years.

The latest report from Rentals.ca Network Inc. showed the average asking rent for all property types across the country climbed from $1,845 in October 2019 to $2,152 in October 2024.

“The whole system here depends on (whether) I can rent at a rate that allows me to accumulate,” Somerville said.

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Statistics Canada’s 2023 survey of financial security revealed the median net worth of younger families (where the highest income earner was under 35) who owned their principal residence swelled by $142,800 from 2019 to hit $457,100 in 2023.

In comparison, the median net worth of younger families who did not own their principal residence increased by just $26,700 to $44,000 in 2023.

That said, the survey also found that an increasing share of young families who did not own their principal residence were generating wealth. Among young families who rented their principal residence and had no employer pension plan, 15 per cent had a net worth greater than $150,000 in 2023, compared with just 5 per cent in 2019.

These families were likely to hold assets in real estate (that wasn’t their principal residence), in registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs).

Other tips for millennials and gen z on investing and wealth creation

People in their early 20s might not necessarily be ready to invest all their savings in an RRSP, which places penalties on early withdrawals, Objective Financial’s Heath cautioned.

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Instead, they could consider using a TFSA, so that they can make tax-free withdrawals when needed, whether for their tuition or to cover their next month’s rent, or even eventually make a down payment on a home.

“It’s good to think long term, but you also need to realize that there are a lot of short-term things that come up when you’re young,” he said.

He also advised that young investors avoid making investments in speculative stocks or relying on social media influencers for financial advice. He recommended that people who cannot afford to work with a financial professional consider low-cost exchange-traded funds that include Canadian stocks, U.S. stocks, international stocks and bonds.

“Wealth creation and becoming financially independent tends to be slow and steady and boring,” Heath said. “I wish there were a magic solution to it, but, usually, it’s just doing a whole bunch of small things right over a long period of time.”

Shen, who co-authored a book, Quit Like a Millionaire, and, with her husband, created Millennial Revolution, a personal finance blog, said she understands why younger Canadians today are frustrated and anxious about their future, whether that’s due to inflation, artificial intelligence or even climate change.

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However, while they can’t change their situation, she said they can change their strategy.

“It’s very easy to get very nihilistic,” she said. “But I would advise trying to look for opportunities to do things differently, instead of just banging your head against the wall and trying to follow the old advice from 20 or 30, 40 years ago.”

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