Today I want to vent about a few societal problems developing as a result of high real estate prices. Home ownership is so expensive these days – seems like every time you take a second look at a property, it is way more expensive than the last time. How are people doing it? How can they afford to buy homes these days?
When starter homes in the GTA suburbs are over $500,000 and tiny condos in the city nudging $300,000, you wonder when something is going to give.
Jamie Henry of Mortgage Broker News wrote an article about this July 15, 2014. According to Royal LePage, average home prices in Canada for Q2, 2014 alone are up more than 5%, and year over year they are up almost 7%. In fact, The Toronto Real Estate Board (TREB) reported the GTA was up 8.5% year over year to May 31, 2014.
As mortgage brokers, we often meet would be first time homebuyers who despair “The longer we save and wait, the more expensive are homes.” Buyers who recently delayed a few months to save a larger down payment (and perhaps lower or avoid mortgage insurance premiums) are facing price increases of more than $25,000.
“Chronic supply shortages are driving price spikes in Canada’s major cities, masking otherwise moderate home price appreciation nationally,” said Phil Soper, president and chief executive of Royal LePage.
Young people often graduate college or university with a significant student loan debt. They also need a new wardrobe, and they are faced with higher transportation costs. But we expect them to save (“check out the benefits of RRSP’s and TFSA’s. Oh and be sure to save up a sizable down payment too.”)
I think renters have to live like frugal paupers if they are to have a chance and get ahead. If that means sharing a house with several people just like while at University, then fine do that. If it means moving back with understanding parents, that’s okay too. I read recently more than thirty percent of young adults ages 20 to 30 are living in their parents’ homes.
The great Canadian bull market for real estate has made a lot of “paper tigers”. Their net worth has gone up substantially over the past twelve years or so, just by virtue of being a homeowner. (Definition of “paper tiger” – one that is outwardly powerful or dangerous but inwardly weak or ineffectual.)
Many are using this increased equity to help out their kids with that first down payment, while others use it to pay down other debt or even to help purchase a second home or an investment property.
Fueling the price rise has been net migration into Canada (in particular our major cities) and incredibly low interest rates which make the cost of borrowing very cheap. In addition, the tail end of the ‘baby boomer’ segment, together with the coming of age of the “echo” generation, have both provided a steady pipeline of prospective home buyers.
Over the past five years I have derided finance pundits warning the sky is falling and real estate prices were about to get their comeuppance. I no longer smirk, as I think high prices are now in fact a societal problem.
But I still refuse to predict the party is over – I learned many years ago as a young stockbroker “Never stand in front of an onrushing locomotive.”
Most apartment leases have a provision for sub leasing – so if you are truly ready to assume home ownership, there are ways you can exit your existing obligation nicely and legally