Stress tests squeezed millennials’ homebuying budgets

The homebuying budgets of Canadian millennials shrank by 16 per cent or just over $40,000 following the introduction of tougher mortgage qualification rules in January, according to a new study.

And young buyers are increasingly responding to these tighter budgets by pooling money with partners, sitting on the sidelines of the market a little longer or turning to parents for financial help in order to make a purchase.

“For peak millennials, the group which makes up the bulk of our first-time homebuyers, the path to property ownership has been a challenging one,” said Phil Soper, chief executive at Royal LePage, the real estate firm that developed the study. “In our largest cities, it is difficult for young people to purchase a home on a single household income.”

Citing Statistics Canada data, the study found that “peak millennial” homebuyers — those between the ages of 24 and 31 — had a median annual salary of $38,148 after heating and property tax costs of $185 per month. Prior to the introduction of mortgage stress testing, buyers in this group who qualified for a 3.09 per cent mortgage rate could afford a maximum homebuying budget of $243,349, including a 20-per-cent down payment.

The new rules introduced by the Office of Superintendent of Financial Institutions require homebuyers to prove that they can pay their uninsured mortgage at the negotiated rate plus two percentage points or at the five-year benchmark rate published by the Bank of Canada– currently 5.14 per cent. Under these rules, the average millennial homebuying budget fell to $203,246 under a 5.14 per cent mortgage rate, a drop of $40,103 or 16.5 per cent, according to the study.

“That might buy something elsewhere in Canada but it makes Vancouver and Toronto basically completely unaffordable,” said Tom Storey, a realtor with Royal LePage who deals mainly with first-time buyers. “And for an average couple it won’t buy much. They’ll probably have to go into the suburbs.”

An average millennial couple with combined incomes sees the maximum purchase price dip to $406,479, down from $486,674 before the stress tests. The wide disparity in prices nationwide means that what their budget will secure at one end of the country is far different from what it will buy at the other.

For instance, couples with a budget of $325,000 to $425,000 could buy 1,736 square feet of space in Halifax compared to just 788 square feet in the Vancouver area, the study states.

While Storey said income levels also range between Canada’s major cities, his own experience is that most young buyers are turning to family for financial support. “About 75 per cent of my clients have backing from their parents,” he said.

“Some get a little help, some get the whole down payment. It’s definitely the norm.”