This article’s title is a frequent quote from journalist Jonathan Chevreau (see here for one among many examples). He is a baby boomer and this advice has worked out spectacularly well for most baby boomers who have followed it. However, today, this advice is likely to lead young people astray.
In much of Canada, house prices have become—pardon the technical term—stupid. My first mortgage was less than one-and-a-half times my family’s yearly gross income. Even cheaper fully-detached homes on nice lots were available at the time. Today I see families getting mortgages for four to five times their gross incomes. The multiple on their take-home pay is even higher. This creates enormous multi-decade financial burdens at a time when secure long-term employment is becoming scarcer.
Getting back to baby boomers, buying a home had many advantages. One such advantage was that in the period shortly after buying a home, mortgage payments forced a family to control spending and save indirectly by increasing home equity. Then as inflation eroded the value of the owed payments, the pressure eased off. Falling interest rates caused mortgage payments to drop even further.
However, today’s home buyers can expect a different experience. Rather than creating a sensible level of forced savings, many families have mortgage payments that are a huge burden eating up a big chunk of their take-home pay. Low inflation takes away the hope that future mortgage payments will be more affordable. There is very little room for interest rates to decrease and they may increase. Even a modest interest rate increase will drive up mortgage payments significantly.
Baby boomers enjoyed huge increases in the values of their homes. In most cases, these increases exceeded inflation by a wide margin. Today’s home buyers can’t expect the same outcome. For house prices to increase by as much in the coming decades as they did in the past few decades, there would have to be a flood of rich people to pay the astronomical prices. It’s possible that house prices will manage to increase with inflation, but another possibility is a substantial drop in prices at some point.
Young people face too much marketing and parental advice to take on huge financial commitments such as expensive houses and cars. A much safer path is to pay as you go by renting and buying modest used cars. The trick with this path is to save a significant fraction of your income along the way. I usually recommend 20% of take-home pay.
The purpose of such saving isn’t just a very far off thing like retirement. Maybe you’ll decide to buy a house when you can better afford it. Or maybe you’ll go back to school. Or maybe you’ll need a cash buffer while you change careers. If this doesn’t motivate you, then just think about the reality of working for several years and having nothing to show for it. You should have some savings in return for the work you put in.
A big benefit that baby boomers got from owning their own homes was ending up with a paid-for home 20 to 30 years later. Those who rent are certainly at risk of having nothing to show for their years of working if they don’t save any money. However, home ownership has its risks as well. Many people today have over-extended themselves and are destined to repeatedly re-expand their mortgages or lose their homes entirely. This risk would become much worse with job loss or if interest rates rise.
Baby boomers who bought homes when they were starting out did well, but this strategy is much less likely to work out well today. Now it’s definitely a bad idea to borrow as much as a bank is willing to lend you for a house. You’re likely better off taking a lower risk path that includes renting a home and saving some of your income as a foundation for financial independence.