Rob Carrick, the author of this article, believes millennials have luckily escaped five significant economic events. Based on the historical graphs provided in the article, students will notice that mortgage rates and interest rates on bonds, term deposits and savings are at the lowest they have been in decades. They will also notice that the inflation rate is very low and housing prices are the highest ever.

In this lesson plan, we explore the effect these financial realities could have on millennials. This economic history is meant to be educational rather than predictive.

Appropriate Subject area(s):

Personal finance.

Key Questions to Explore:

• Who or what is a millennial?
• What is the relationship between interest rates and inflation?
  • Interest rate is one of the key drivers of inflation. In general, lower interest rates attract more borrowers, who subsequently spend or invest the funds received. This causes the economy to grow and inflation to increase. The opposite holds true for rising interest rates. An increase in interest rates incentivizes consumers to save as returns are higher. As a result of higher savings, consumers are left with less disposable income, causing the economy to slow and inflation to decrease.
• What is the difference between a variable interest and a fixed interest mortgage?
• What is a budget deficit?
• Why did the Canadian government run a budget deficit after the 2008 financial crisis?

New Terminology:

Millennials, Fixed rate mortgage, Variable rate mortgage, and budget deficit.

• Millennial:  definitions vary, with some trying to be precise by saying a millennial is an individual born between 1982 and 2004 and others using the term rather more vaguely to describe people who came of maturity around the turn of the century.
• Fixed rate mortgage: A fixed-rate mortgage is a mortgage that has a fixed interest rate for the entire term of the loan.
• Variable rate mortgage: A variable rate mortgage, also known as adjustable rate mortgage, is a type of home loan in which the interest rate is not fixed. Rather, the interest payable changes with the prime lending rate, as set by the lender.
• Budget deficit: This occurs when government revenue, in the form of taxes, exceeds government spending. High budget deficits mean that governments have to rely heavily on debt to carry out their duties effectively.

Materials Needed:

A copy of the article

Introduction to lesson and task:

In this article, the author goes through some financial events that have not occurred during most millennials’ lifetime, but could occur in the near future. These events include the following:

High mortgage rates: Mortgage rates are currently abnormally low. According to RateSpy.com, in the 1970s five-year fixed rates were at 21.75%. Then they drifted down to 10% in the mid 1980s, before rising back to 14% in 1990. Today, five year fixed mortgage terms are at 2.06%. Factors that could lead to higher mortgage rate: positive economic growth, low inflation, monetary policy (low money supply).

Rewarding interest rates on bonds, term deposits and savings: The high mortgage rates in the 70s, 80s and 90s provided Canadians with an opportunity to earn double-digit returns on safe investments. Today, interest rates on bonds, term deposits and savings are very low. If mortgage rates increase, millennials can expect better returns on their safe investments.

Inflation: In the early 1980s annual inflation rate was in the 10-12% range; today, the annualized rate of inflation is 1.3%. This means that in the 1980s the purchasing power of money eroded much faster than today. As a result, the real cost of living in the 1980s rose much more quickly than it is rising today. If there is a significant rise in inflation in the future, all things being equal, millennials will see their standard of living drop. Fun fact: Bank of Canada’s inflation-control target is currently at 2%.

A boring – or declining housing market: In the 1990s average national prices rose by just 1.5% on an annual basis. Over the past 30 years, falling interest rates helped generate average annual price gains of 5.9% nationally. For most millennials’ adult lives, there has been a steady rise in housing prices; however, this was not the case between 1989 to 1995 when the average price of houses in Toronto fell from $254,197 to $195,311.

Canada as a global financial weakling: Today, Canada is on the forefront of the global stage. This is largely due to stronger fiscal and monetary policies which have reduced Canada’s budget deficit. However, Canada maintained huge budget deficits on its books from the early 1980s to late 1990s. (See graph)

Action (lesson plan and task):

• Hand students a copy of the article.
• Ask students to state whether each financial reality would have a positive or a negative effect on millennials in the economy:

• Ask students to explain how high inflation rates will affect millennials’ standards of living
• Ask students to state which organizations or groups of people stand to gain or lose if mortgage rates rise.
• Ask students to explain how the Canadian government generates adequate income to cover a budget deficit.
• Ask students to explain the link between interest rates and inflation rates.
• Ask students to identify some factors that could lead to a decline in the average price of houses in the Canadian housing market.

 Consolidation of learning:

• Ask students to predict which of the five financial realities is most likely to occur. Students should be asked to state their assumptions and reasoning behind their predictions.
• Ask students to predict which of the five financial realities is least likely to occur. Again, students should be asked to state their assumptions and reasons for their decisions.

Success criteria:

• By the end of this lesson plan students should be able to explain how each financial event listed in this article could impact them.

Confirming Activity:

• Ask students to explain the link between interest rates and housing prices.