Currently renting a downtown Toronto condo and expecting their first child, Charlotte, 31, and her husband, 33, are on the hunt for a detached house in Toronto’s west-end suburbs with a $750,000 budget. This millennial couple has been strategic about financial planning—understanding the market and pooling their money together. And no, they aren’t getting a down payment from their parents.
“Saving for a rainy day is something my parents instilled in me from a very young age,” says Charlotte, a trader for a financial firm who declined to use her last name for professional reasons. “Being in the finance industry, my pulse was on interest rates. I saw the numbers, and some pockets pulling back, and that’s when we got in.”
But not everyone is so lucky or resourceful. In an era where millennials are being labelled the “brokest” generation, their chances of owning property may feel like a millennia away.
Credit Suisse’s 2017 Global Wealth Report points to many factors that have hindered this generation’s progression including: the financial crisis between 2007 and 2008, high unemployment, tighter mortgage rules and increasing housing prices, to name a few. Despite being better educated than their parents, their rate of wealth accumulation pales in comparison.
Understanding the financial challenges facing millennials
In Canada, millennials are taking on more and more debt, increasing their borrowing by 12 per cent last year, according to a TransUnion Canada report released in March. Though their annual entrance salaries aren’t too terrible—according to a 2017 report from the Conference Board of Canada—with bachelor degree grads starting at $54,295, precarious employment and the rise in the cost of living are taking their toll. Just this year, the monthly cost of living in Toronto rose $400 to $2,740.48. In Vancouver, costs are even higher at $2,795.64 per month, while Montreal sits at $2,003.60 and Calgary, $1,842.69.
“It’s [millennials] quite a diverse group—probably more diverse than any generation before, in terms of the debt they’re graduating with and the lack of access to good career jobs,” said Doretta Thompson, CPA Canada’s director of corporate citizenship in a Q&A about bringing financial literacy to the world. “We’re seeing lots of people that are still basically in contract work—the gig economy—and then, of course, there are the sociological and technological factors that really divide that group.”
So, what about their property buying power? Well, since the introduction of the mortgage stress test—making it harder to get approved and increasing minimum down payments— in January and rising interest rates elevating borrowing costs, opportunities have diminished.
The average home in Toronto and Vancouver as of April 2018 was $866,300 and $1,129,800 respectively.
According to Royal LePage Real Estate Services, “peak millennial” (25 years and older) homebuying budgets have shrunk 16 per cent, or slightly more than $40,103 since January 2018. Buyers working with a median annual salary of $38,148, now have a housing budget of $203,246 after factoring in a 20 per cent down payment. And though housing prices have certainly cooled in some Canadian markets, the average home in Toronto and Vancouver as of April 2018 was $866,300 and $1,129,800 respectively, compared to $500,700 in Calgary, $411,400 in Montreal and $320,000 in Halifax. Given these numbers, young buyers are banding together to buy, relying on family handouts or delaying the pursuit to own altogether.
Millennial Eric Hertel can relate. The 31-year-old project implementation coordinator at Royal Bank of Canada scoped out the Toronto housing market for about six months before abandoning his ambitions. Yes, he had savings, but the competitive market and the limited options—given his $350,000 budget—were worthy deterrents.
“It was not about needing somewhere to live. It was more about: is this a good investment opportunity?” Hertel explains. “It all comes down to my income and it not being enough for the market…there’s a huge discrepancy.
“I would be house poor and wouldn’t be able to do anything else.”
For Andrew and Emma Elliott, aged 36 and 32, landing their four-bedroom detached house in downtown Ottawa last October was about being in the right place (financially) at the right time. Scoping out the market for about two years, the couple—who have a two-year-old daughter—held out for the home they wanted by renting for a year, saving up a good chunk and getting help from family.
They also got into the market right before the mortgage rules changed and had enough for a 20 per cent down payment. Their only real setbacks? Not qualifying for a lower interest rate, as Emma was a contract employee at that time, and the overall home-buying experience, which Andrew describes as “sleazy”.
“I didn’t want to have to do this again,” he says.
Moving through the stages of the Canadian housing market
The varied experiences amongst millennials aren’t surprising, says Toronto mortgage agent James Robinson, of Dominion Lending Centres Mortgage Watch. He believes they aren’t much different from generations preceding them. Chocking it up to the collective doesn’t consider the many variables: education, employment, income level and financial help, for example.
“I don’t agree that generations are fundamentally different than previous generations,” says Robinson. “As with every generation, you’ve got the haves and the have-nots.”
Gustavo Durango, senior economist with the Canadian Mortgage and Housing Corporation agrees, adding that young buyers today enter the market as they always have—in stages, but with different options available. “As they progress into the market, they are not going to be in a single-detached home but progressing into a condo…and moving up the ladder,” he says.
“[Owning property] is the number one way to ensure wealth.”
It goes something like this, explains Robinson: those who once sought detached homes can now only afford semis; those who looked at semis are relegated to condos; and the condo seekers? Well, as Hertel discovered, they find themselves stuck in the rental market, which itself is competitive with increased demand, bidding wars and rent control.
“It has had a significant impact,” adds Robinson. “That is the one thing that has caused the shift in attitudes. They say, ‘I can’t afford a house anymore, so we have to rent’.”
Michael Ferreira, managing principal of Urban Analytics, shares similar insights into Canada’s western markets. “Pricing is the biggest challenge in terms of getting into the market,” he says. “Being compounded by the combination of a gradual increase in borrowing cost and the design of the stress test, it’s impacting buyers not just in Vancouver, but in Calgary and Edmonton as well.”
Will housing market cool down help or hinder millennial buyers?
Recent headlines suggest a cooling of the condo market that may be good news for those holding out for that purposeful investment. Feeling a buyer shift, condo projects—with the average unit in Toronto exceeding $560,000 and the benchmark price in Vancouver sitting at $701,700—are taking longer to sell, causing some developers to offer incentives, such as cash and free parking, to attract buyers. If the units don’t sell, shovels won’t hit the ground, Robinson says, so prices may drop.
“Everyone should be very happy if condo price growth slows to the historical average of around five per cent, which is still double the rate of inflation and is a more sustainable number that will reduce the number of people being pushed out of the ownership market,” shares Robinson. “Twenty per cent upward spikes are as unhealthy as price drops.”
For millennials who aren’t giving up—according to a RBC poll, released in February, about half respondents (48 per cent) aged 25-34 cited home ownership as a top financial priority—Robinson recommends getting into the game as soon as possible. “If your goal is to build wealth, get your toe in as early as you can,” he recommends. “If you don’t start, then you can’t move on.”
Elliott agrees, adding that for him and Emma, it wasn’t just about buying a property they could grow into as a family, but finding the right investment for the “very” long term.
“We heeded the advice of our broker, who told us to spend to our limit and don’t move,” says Elliott. “[Owning property] is the number one way to ensure wealth.”
For Hertel, he’s got other sights in mind, such as paying off debt and travelling. “I’m at a stage where I don’t have a lot of ties,” he says. “I don’t have a partner. I don’t have a kid. I don’t have a dog. I’m young and still have that twinkle in my eye.”
And as for Charlotte and her husband, the goal is to close on a property before their baby girl arrives in September. But if they must hunker down in that rental condo for a few more months to find their dream home, so be it.
“Growing up, my parents would make us an ice rink [in the backyard] in the winter,” Charlotte says. “It’s what we grew up with. It’s [about] going back to what you are used to.”
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