Why saving for a down payment has become next to impossible in big cities
High cost of living in major cities tests would-be homebuyers’ ability to save up
If you're a first-time buyer, diligently saving for a new home means you'll probably end up paying a lot more for that home.
It's like the universe's most depressing game of Monopoly: you pass “Go,” collect your $200, and home prices rise four times that.
Fresh data from the CMHC suggest it takes an average of 4.2 years to save for a down payment. That doesn't sound so bad, given all the doomsday headlines about down payments taking decades to accumulate.
The problem is, relying on averages can be deceiving.
In high-demand regions like Toronto and Vancouver, accumulating a minimum down payment on an average home takes individuals well over a decade, even if they make $100,000 a year and save 10 per cent of their gross income, tax-free, at a conservative rate of return.
And who can afford to save 10 per cent of their income amid sky-high rents, wallet-shrinking inflation, unexpected expenses and the taxman's shakedown?
But let's play along with the 4.2-year down payment fairy tale, for conversation's sake. What happens to prices over 4.2year spans?
Using data from the Canadian Real Estate Association (CREA) going back to 1981, Canada's average 12-month home value gain is 5.75 per cent.
So if we take CREA'S average Canadian home price of $698,530 and increase it 5.75 per cent a year, that's a $185,104 surge in prices in just 4.2 years.
There's no way an average Canadian can save enough to offset that, let alone a first-time buyer yearning for an “average” home. You'd need a couple, each raking in way beyond $100,000 a year, to save that much that fast.
Albeit, an individual earning $100,000 a year and squirrelling away 10 per cent of their income at a three per cent return could at least amass the minimum down payment in less than five years. That gets their foot in the door, regardless of all the extra principal and interest they'd have to pay over their lifetime.
OK, that's all fine and dandy, but step into our biggest urban jungles, and the situation goes from tough to “you've got to be kidding me.”
Imagine you're a single buyer earning 100 grand and eyeing the average condo in Toronto, which is $766,917, according to the Toronto Regional Real Estate Board. If you're not in the 30 per cent of buyers receiving a family gift for your down payment and have no other options or help, it would take over seven years to save up today's minimum down payment for that condo based on historical appreciation rates.
“Today's” is the keyword. The problem is, just five years into your diligent savings, that formerly $766,917 condo would shoot well over the government's $999,999.99 maximum value limit for default insurance. At that point, you'd need to put 20 per cent down instead of 7.5 per cent or less.
But there's no way you could ever save a 20 per cent down payment on a $100,000 wage and earning a three per cent return, even if using a tax-sheltered savings account. You'd need to put even more money aside or take significantly more risk with your investments.
I won't bore you with any more hypotheticals, but suffice it to say, this is where a fee-only financial adviser can help you run scenarios, confirm your necessary target return, and plot out how long it's going to take to save the down payment you need.
On a side note, the government has refused to index its $999,999 default insurance property value limit to rising home prices for 12 years. That makes a mockery of any commitment to mortgage access in big cities. The Liberals promised this change back in 2021, but such an increase would boost prices further, other things equal, and they didn't like that trade-off.
THE MESSAGE
It's a hard pill to swallow that someone in this country earning six figures and saving one-tenth of their income has such a hard time saving for even a pigeonhole condo in our major metros.
Federal and provincial governments say they've got their best people on the problem, but they're so late to the fire, affordability is practically in ashes.
If I were a spry first-time buyer eyeing Canada's home-buying mess, I'd come to one swift verdict: find some way to finagle a down payment pronto, in case prices take off again.
That's not to say prices will continue rising at historical rates. They may not due to changes in immigration, affordability constraints, a weaker economy and new aggressive homebuilding policies. But they will beat inflation over the long run, as they always have, and that's enough to keep moving the goalposts on minimum down payments.
Besides playing the lottery, some of the ways people are piecing down payments together include: hitting up the parents or grandfolks for a “gift” or early inheritance; settling for an entry-level property of $500,000 or less where the minimum down payment is only five per cent; joint home ownership with someone who has more down payment funds than them; using shared-equity providers such as Ourboro, Lotly and Arch; a borrowed down payment (which is a bad idea unless they can comfortably service all their debts and expect a significant income boost).
This is the bind that our leaders, who largely puppeteer housing supply and demand with their immigration and housing policies, have put our young people in. It may well contribute to the undoing of this government 17 months from now. But if you want to buy a home, don't let that drama detract you from building a down payment ASAP.