Welcome to this month’s instalment of Dear Urbaneer where we tackle tough real estate questions from our inquisitive clients. This month's question came from one of our millennial house hunters who is wondering how (and if) he’ll ever be able to become a homeowner.
I’m getting close to 30 and I’d always set home ownership as one of my goals, having watched my parents done well in the real estate market. However - and I know I am not alone in this - it feels like homeownership is an impossible dream for my generation. Especially in Toronto, where housing is so expensive! How are millennials getting their feet into the homeownership pool?
Trying to Keep my Homeownership Dream Alive
Here is my reply:
Dear Homeownership Dream:
First, there's no question there are abundant challenges for millennials hoping to own a home in a pricey market like Toronto. There appear to be obstacles seemingly coming from all angles. Millennials - with their oft pursuit of higher education (because they've been told it's essential in this day and age) are heavily laden with student debt that previous generations haven’t had to deal with to the same degree, which is already taking a bite out of their cash flow. This, in turn, is creating challenges in being able to amass the savings needed for even the minimum down payment. There's also the problem with a lack of available supply, given statistics show more and more Baby Boomers are choosing to stay in their homes and age-in-place, which is causing a backlog in the property ladder progression. And as if all of this wasn’t challenging enough, the introduction of more stringent lending policies have placed another potential barrier in the way of home ownership.
It really does seem like the housing odds are stacked against the millennials.
That said, is home ownership out of the question for millennials? Not necessarily, but it certainly is far from easy. But, as with any real estate purchase, taking a prudent well-thought-out well-researched strategy is essential. For millennials, given the numerous hurdles to cross, creative solutions and a buying strategy are even more important.
The New Reality
It’s not surprising to learn that homeownership rates are down among millennials. If millennials feel like homeownership (and the pursuit of it) is a totally different experience for their generation, it’s not just an emotional response to feeling left out. It’s the real deal.
This study is US based, but the sentiment is the same this side of the border. Rates of homeownership are lower amongst millennials than they are for Gen Xers and Baby Boomers when they were at a similar stage of their lives (25-34 years old).
The latest Canadian census found that Millennials were less likely than Boomers to own a home at the same age (age 30).
This article from the Financial Post “Millennial Housing Crisis? Turns Out, It's Real And Worse Than You Thought” says, “Canadian millennials are shouldering a particularly heavy burden by historical standards, analysts say, one brought on by dizzying price increases, but also lagging incomes and tighter regulations.”
Research group, “Generation Squeeze” examines a number of the challenges facing, including becoming homeowners. As this recent study (Straddling The Gap: A Troubling Portrait Of Home Prices, Earnings And Affordability For Younger Canadians) shows, although there have been measures taken to cool the market, an enormous gap remains between incomes and housing prices, especially for those just starting out. To bridge that chasm, housing prices would need to come down or earnings would need to go up. According to the study, for housing to becoming affordable in Toronto, “Average home prices would need to fall $523,000 – two-thirds of the current value; or typical full-time earnings would need to increase to $150,000/year – triple current levels.”
The study also demonstrates that it takes a lot longer (and it is a lot harder) for millennials to get a 20 per cent down payment. Forty years ago, with the cost of living, and little or no debt coming out of school, it would take an average person about 5 years to save up a 20 per cent down payment. With today’s high cost of living in Toronto and existing debt loads that many youths are burdened with at this life stage, that time window has extended by 11 years. It would take a staggering 21 years to reach that savings goal.
And yet, the dream of homeownership burns brightly.
Why? Because home ownership means more than just a single goal for us, which I explore these pieces: “Maslow’s Hierarchy Of Needs And Toronto Real Estate For Buyers” and “Maslow’s Hierarchy Of Needs And Toronto Real Estate For Sellers. Housing meets our needs financially, socially and emotionally. It’s an affirmation that you are “biologically on schedule”; it is a way of creating financial and physical security; it is about status; it is a means of self-expression.
Despite all of the challenges and associated costs, homeownership a goal that millennials put at the top of their priority list. A recent survey by Genworth showed that 30 per cent of millennial respondents intends to buy a home in the next two years.
Click here to read my post “Why Does Homeownership Remain A Priority For Canadians, Despite The High Costs?”. I discuss what lengths (and what debt levels) homeowners are willing to go to, just for that ability (whether be for status, shelter or investment) to own a home. As I mention in this piece, Canada has one of the highest home ownership rates proportionately speaking in the world, despite the fact that we have some of the priciest markets in the world in relation to income (Toronto and Vancouver).
So knowing the very real challenges opposing home ownership, placed against the ferocity of the dream of homeownership, how can a Millennial achieve this goal? Creative solutions, determination and clever strategies like these:
Living With Mom And Dad
In the 1970s through 1990s, there was sometimes a stigma associated with adult children remaining at home longer than when they traditionally would have “flown the nest”. However, earlier generations (pre 1960s) generally stayed living with their parents to save money until one got married and purchased a matrimonial home. Today's current generation may not stay home until they partner up, but more and more adult children are remaining at home with their parents after graduation - because it's a pragmatic solution. With rents rising as well, sometimes staying at home a little longer with Mom and Dad is one way to keep expenses down and amass a larger down payment in order to get into the Toronto real estate market.
The latest Canadian census found that more and more young adults are living with their parents. Interestingly, Toronto had the largest share of young adults living with their parents at 47.4%.
Allowing kids to live at home longer rent-free is also a great way for parents to help children with a down payment and to pay down debt, especially if they don’t have the funds on hand to gift them cash to boost a down payment. This can also help to reduce the time that it takes these days for hopeful homeowners to save that large sum for a down payment. As I've long counselled prospective real estate buyers, saving the down payment is the hardest part of getting onto the property ladder. Take advantage of the CMHC first time buyer's program where you can borrow against your RRSP... it's one way to facilitate your first purchase, even if it's a micro-condo.
Borrow From The Bank Of Mom And Dad
The Bank of Mom and Dad is a growing phenomenon in Toronto, to the point where it is actually having an influence on home prices. We are witnessing some of the greatest transference of generational wealth in recent history, as Boomer parents tap into the small fortunes (relatively speaking) that they made with their real estate purchases over the decades (or inherited themselves) in order to help their Millennial children be able to afford to buy homes.
Whether it is gifting kids money for a down payment, giving them a financial boost in order to be able to extend their budgets, or giving them large sums of money to keep mortgage debt lower, it is becoming more and more necessary for millennials to turn to family for help in achieving their home ownership dream. I would say about two-thirds of my Buyers purchasing their first or second 'climbing-the-property-ladder' purchase are getting financial assistance or gifts from family.
Click here to read “How The Bank Of Mom And Dad Is Stabilizing Canadian Real Estate Prices”.
Many house hunters, regardless of their stage of life will find themselves at some point in time having to re-adjust their expectations and house hunting priorities in order to make that purchase. For millennials, either due to affordability and/or available stock, they may have to redefine how and where their home ownership dreams will unfold.
This may mean moving to a community that is a little farther out of town, where housing prices are more affordable, but you might be faced with a longer commute.
This may also mean changing expectations around housing type, or size. For example, the Canadian dream is still rooted in the fantasy of owning a detached single family house with a garden but, realistically for most, the first purchase is more likely to be a co-op, a coownership, or a condominium (here's What’s The Difference Between Condominiums Versus Co-Ownership?). And it might even be a micro-condo, like Toronto’s Micro-Condos By Smart House. By the way, one important rule of thumb. Whatever you buy should be able to generate a rental income that aligns close to your actual housing expenses so that, in the event, you lose your job or get relocated, you can place a tenant in the property to offset your shelter costs and help mitigate any risk of taking a financial loss.
Shifting expectations doesn’t increase your budget, but it does stretch your dollar further if you are willing to compromise and be open to other options.
It is becoming more and more common for millennial house hunters to join forces when buying a home. In a market where there are many challenges, sometimes you need to buck traditional “buyer profile” and find alternate paths to reach your goal. Teaming up with your sibling, friend, college roommate, business partner, etc. etc. means a larger down payment as well as help in running the operating costs once you become a homeowner.
Co-ownership is a creative, viable solution to become a homeowner in a pricey market. I explored co-ownership models and pros and cons in my post: “How To Create Co-Ownership Options With Freehold Housing”.
I not only co-own a property with one of my best friends but I' m also working with a pair of buyers who are pooling their resources in the hopes of purchasing a two-unit dwelling - as a way to get better value for their dollar. It's not an easy process in terms of qualifying, getting the deposit and down payment, and agreeing on what constitutes the right dwelling, but I think it's an excellent opportunity to build security with a chosen family.
Fixer Upper/Sweat Equity
Another way to get your budget to go a little further is to be willing to reduce your price point and buy a fixer-upper. Buying a fixer-upper is more and more common in Toronto for homebuyers hoping to move up the property ladder, as well as first-time buyers. This is in part because of limited stock and also because of budgetary constraints as many homes still sit priced well out of reach for many.
Investing a little sweat equity not only increases your purchasing options within your budget, but it also gives you the opportunity to put your personal stamp on a home, as well as alter it to suit your needs as you continue to move through life’s stages.
It can be exciting to snatch up a property at a lower price point in a neighbourhood that is on the cusp of rebirth and gentrification. These neighbourhoods invariably have a uniquely cool vibe, as well as good value for the real estate dollar. My advice on up and coming locations include St Clair West (of Dufferin) and Here Comes The Eglinton Crosstown LRT.
Check out my post called Move-in Ready Or Fixer Upper? What’s Your Housing Match? and this piece which has some essential tips for those tackling a fixer-upper --> On Flipping - Or Building Equity - For Toronto Real Estate Buyers. However, be aware buying a fixer-upper is not for everyone, as it can be emotionally and mentally draining living in a property which is in a constant state of repair (and dated, and well, ugly), plus it can be stressful living hand-to-mouth for an extended period of time while all your extra cash is funneled into the not-so-pretty components of bricks and mortar.
Roomies And/Or Rentals
Home ownership can be more affordable if you can increase your cash flow and reduce your out of pocket costs while you own your home. It’s ideal in this case if you are able to purchase a home with a rental opportunity. You might be lucky enough to have a full rental suite in said property but, keep in mind during your housing search that a property with an income supplement tends to sell for a premium. Why? Because some lenders will approve a larger mortgage to a buyer who purchases a dwelling with an existing tenant in a secondary suite, because of the income offset. Meanwhile, the similar property without a secondary suite may sell for substantially less, even though the space plan might make dividing the property into two or more units relatively easy, and you have sufficient capital to install the additional kitchen(s). Here's my helpful post that outlines what to look for in a single family dwelling that can easily become revenue generating in How To Strategically Purchase An Income Producing Property
Consider taking a cue from a lot of European immigrants who came to Toronto up through the 1960s. It wasn't unusual for the family to live in a portion of the house while they rented out bedrooms. I followed this path myself in my early 20s when my partner and I broke up shortly after purchasing our new Home (traumatic to say the least). I moved in, got three roommates and finished the basement into a rental suite, which generated enough income that I didn't have to sell and incur a financial loss.
You can even rent out parking if you’ve got it (and if its in a condominium, the rules don't prohibit it). After all, every dollar counts when you are trying to manage costs while owning a home.
Here are some interesting stories about the challenges facing millennials and some of the proposed solutions. “Canada’s Millennials Still Dream Of Home Ownership – And Make It Happen ,“14 Millennials Got Honest About How They Afforded Homeownership”, “As Housing Affordability Erodes, Millennials Forced To Get Creative To Buy That First Home,”, “Study: Many Millennials Want to Become Homeowners But Believe It’s Impossible”, and “5 Millennials Who Became Homeowners In Their 20s Share Their Best Advice For Buying Your First House”
Are you a house hunter who dreams of owning a home, but feels like the market is not working in their favour? A little strategy, patience and creative thinking can go a long way to help you achieve your housing dreams to help you take that first step up the property ladder.
Here are some of my other posts which may be helpful:
May my team and I be of assistance?
Please know we are here to help!
And thanks for reading!
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
- we're here to earn your trust, then your business -
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