HOME OWNERSHIP DREAM NOT OVER FOR MILLENNIALS
‘Fear of missing out’ driving cohort into market, Garry Marr writes.
Record real estate prices aren’t scaring millennials out of their dreams of home ownership, but they may be making young Canadians more cautious — and even more creative — when it comes to buying in.
A recent study suggested nearly 40 per cent of those between the ages of 18 and 34 think they’ll buy a home in the next two years, despite the high-profile concerns about overheating in both the Toronto and Vancouver markets.
With the spring buying season now in full gear, the question many are asking is whether it’s time to jump in or hope housing cools off.
“One of the top reasons firsttime buyers are delaying their purchase on some level is the cost to carry (a home),” says Nicole Wells, vice-president of home equity financing at Royal Bank of Canada, which conducted the study on buying intentions.
Rates still drives the overall cost of any mortgage and, with the cost of borrowing for five years at a fixed rate as low as 2.89 per cent at some banks, the real worry is rising rates.
The federal government has shined a light on that fear and now forces consumers with loans backed by Ottawa to qualify based on the posted rate of 4.64 per cent.
“The smart first-time buyer is looking at whether they can afford that house in the future,” said Wells.
The RBC poll, released in April before Ontario came up with plans to try to curb 33 per cent year-over-year price appreciation in the Greater Toronto Area, also found the top reason to delay purchasing a home was the belief that prices will come down.
Ontario’s changes, which included a 15 per cent tax on non-resident buyers, could cool the market as it did in British Columbia when that province imposed its own 15 per cent tax on foreigners in the Vancouver area.
Wells says it’s difficult to time the market and suggests purchasing the home that fits your needs and your current financial situation, which includes having enough money to make a down payment. You must have at least five per cent down to borrow from an accredited financial institution, 10 per cent for any amount over $500,000, but consumers who can get to 20 per cent can avoid costly mortgage default insurance.
First-time home buyers make down payments of 21 per cent of their home on average, according to a report from Mortgage Professionals Canada released in December 2016.
The study found 49 per cent of all first-time buyers saved or used their own money for a first-time purchase but 14 per cent had help from families.
“You want to have good clear plan of description of how a parent would want to help,” says Wells. “I don’t see (family support) going down anytime soon. Prices are really high in some markets so they need to turn to parents to get into the market at some point.”
Millennials are also increasingly turning to alternative modes of raising funds and sharing costs to find their way into the market.
Some are pooling resources to buy homes together, a phenomenon for which there is little concrete data but plenty of anecdotal evidence. Others are buying with the intent of renting out part of the home either on a long- or shortterm basis.
Altus Group found in a study released in April that among those under 35 years of age, living in Toronto, Vancouver, Calgary and Montreal, 15 per cent used a shortterm accommodation service to rent out part of their homes. Millennials in those cities, who also had a mortgage, rented out space short-term 22 per cent of the time.
While such short-term rentals won’t get you a larger mortgage because the funds cannot count as income for loan purposes, they can provide some breathing room for cash-strapped homeowners.
Targeting fixer-upper properties is another way millennials are finding their way into the market.
Michael Garrity, chief executive of Financeit Inc., which provides financing for unsecured instalment loans that start at seven per cent, said the majority of his company’s business is now renovations. Altus has said it expects the renovation market to be worth $71.4 billion in 2016.
“We have seen a 66 per cent increase in the last two years of millennials using our platform to get home improvement loans,” said Garrity. “We’ve asked why. We have narrowed it down to three things. One is demographics, the oldest millennials are now 34. They might have been in a house for five years (and want to renovate). The second characteristic is the housing market is getting overheated. millennials are looking for value and that’s a fixer upper. Finally, it’s been cool and exciting to do home improvements.”
Still, millennials seem to be more nervous.
A survey from TransUnion, which provides credit scores, found in April that 56 per cent of millennials in that 18-34 age group agree that headlines around home buying in Canada are making them fearful of their home buying potential.
“We are seeing an increase in millennials taking a look at their credit and deciding they are not ready,” said Heather Battison, vice-president TransUnion.
Doug Porter, chief economist with Bank of Montreal, says putting everything together including new mortgage lending rules, rising prices and potentially higher interest rates is incredibly challenging for millennials.
So why are millennials still piling into the market?
“There is a legendary fear of missing out. It was heightened in Toronto and Vancouver. But on a longer term, we’ve seen housing going in one direction for something like 15 years now.”
Porter says in places like Vancouver people have gotten creative about how they share space, and pay for it and he expects more of that.
“You get into multi-generational situations,” he says. “That’s the kind of thing you see in Europe. You can go to places like Germany to get an idea of what the future will look like. There’s a lot more renting and houses become intergenerational assets that never leave the family.”
Prices are really high in some markets so they need to turn to parents to get into the market at some point.