real-estate-terraced-house-for-sale

Every Thursday, my mailbox fills with flyers from real estate agents keen to represent the sale of my house. These slick missives highlight how quickly their past listings sold, and tout the sums over asking garnered from buyers.

The past few months, I’ve noticed a telling trend: the average overpayment for houses in my neighborhood far exceeds what I paid, in total, for my first home; and would even cover what I laid out for improvements during the 10 years I lived there. That’s called a bubble. Or is it? For a bubble to exist, price increases must be unreasonably steep, and driven by illogical assumptions about the assets being bid up—tulip bulbs, stocks, houses in Toronto, whatever.

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But there isn’t a bubble if something’s legitimately creating demand.

Recent headlines suggest population growth and a short supply of well-located homes will keep appetite strong—for now. And over the short term, at least, a sliding loonie will likely spark foreign investment in Canadian real estate. But, I’m not sure today’s speculators are properly considering the potential for Generation Y to one day tank demand.

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A recent PayScale survey titled “Gen Y On the Job” finds U.S. underemployment rates for Millennials at 34%. The survey, which has no Canadian counterpart but took data from more than one million employed university graduates in late 2014, also found X-er underemployment is 27%, and that only 25% of boomers report being underemployed.

And, since many surveyed Millennials say they don’t plan long stints with any one employer, they may have a harder time obtaining mortgages. These factors could spell trouble when boomers need to sell, because it’s unlikely Gen Y will be able to buy their houses. Which means boomers either need to cash out before markets crest the peak, or risk slipping a couple of pegs on the net worth ladder sometime in the next decade. And yet, if prices do begin dropping, it’s unlikely an entire generation will fitfully dump properties to avoid more downside. Most will take the short-term net-worth hit and wait for a rebound.

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There’s a lesson in there for your boomer and X-er clients who ring the phone and ask about strategies for managing future corrections—assuming these calls are based on sentiments more sophisticated than “don’t lose ANY of my money.” If home prices soften, you’ll be able to use the analogy of hanging onto a house that’s dipped below the price paid (and later rose) to help nervous clients grasp the concept of holding on when equities experience a correction.

And a lot of your clients will have first-hand experience. Many people who first bought real estate around 1990 saw a period (late 1991 to mid-1995) during which their homes either saw no appreciation or were worth slightly less than what they’d paid. Yet they didn’t hang out For Sale signs in droves, because those houses still provided them with places to live.

Thirty years of chasing real estate returns has wired boomers to believe housing prices will always rebound. They’ve learned to hang in, so extend the lesson to stocks by using real estate bumps and swings as an illustration.

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For my part, I’m banking on Generation Z, the tech-savvy offspring of Gen X, who are reportedly eschewing formal education and setting the entrepreneurial world on fire. When their ship comes in, I’ll dial the number on one of those flyers.

Agree? Disagree? Respond in the comments or write to Philip.Porado@advisor.rogers.com.

by Philip Porado, a financial columnist based in Toronto. phil.porado@gmail.com

Originally published in Advisor's Edge

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