By Adam Mayers, Personal Finance Editor
First time-homebuyers are a major market force. They are arriving with big down payments, and reducing their risk with five-year mortgages.
Canada’s decade-long housing boom shrank to a three-way race this year with Toronto, Calgary and Vancouver the only markets still showing better-than-average growth.
As we head into 2015, the field has shrunk to two. The collapse of oil prices is denting the Alberta economy, hurting the prospects of those living in its biggest city. The Canadian Real Estate Association said last week that the average price of a Calgary home was 9.5 per cent higher in October than a year ago. But as Robert Kavcic, an economist with BMO Capital Markets, told the Calgary Herald, what’s in the rear view mirror ain’t what lies ahead .
“We’ve seen the highs for home price growth in this city for a while,” Kavcic said.
Should we be worried, too? I don’t think so. Price increases will moderate as interest rates slowly rise, but that’s no cause for panic. Home ownership is about a place to live, so the horizon should be long. While the big gains for condo investors may be over, for those who plan to live and work in Canada’s largest and most desirable city, waiting probably won’t help. If they’re forming households or just tired of paying rent, they might as well pay themselves first. That’s the prime law of personal finance.
This year, Toronto house prices are on track for another record. They were up almost 9 per cent in October compared to a year earlier driven by a shortage of listings. The average home price in the GTA was $587,000.
The driving force as we all know is a rock-bottom interest rate. Mortgage rate aggregator Ratehub.ca was quoting a five-year fixed mortgage Monday through Canwise Financial at 2.69 per cent. If you borrow $400,000, the monthly payment is $1,830 at that rate.
A five-year mortgage at less than 3 per cent offers insurance against a weakening market and time to chip away at the mortgage principal.
An annual study by the Canadian Association of Accredited Mortgage Professionals (CAAMP) confirms that first-time buyers are thinking along those lines. Far from being naïve, they’re aware of the risk and coming in with hefty down payments (as they historically do) and locking in for longer terms. CAAMP says about eight out of 10 borrowers are opting for fixed, longer-term mortgages, typically five years.
CAAMP finds that about half of the Canadians buying homes this year — 210,000 in all — were first-time buyers. Their average down payment was 21 per cent of the home’s cost, providing a cushion against rising rates and falling prices.
The big down payment also allows most buyers to avoid Canada Mortgage and Housing Corp. insurance. While that has been pretty consistent for several decades, what’s changing is how young people are coming up with the cash. They’re finding it harder to save enough to keep ahead of price increases, so they’re relying more on gifts and loans from parents and grandparents.
This intergenerational transfer of wealth represents the fact that their parents and grandparents have done well and want to give the kids a leg up, too.
“It’s a reflection of what it costs to get into the market,” says Jim Murphy, president of CAAMP.
So if the kids are buying a $500,000 home and putting $100,000 down to get that 2.69 per cent mortgage, family are chipping in $17,000 of the down payment, either as a gift or a loan. While the loan portion has remained static over the past 25 years, the gift component has been rising.
Real estate lawyer and author Mark Weisleder says $500,000 doesn’t get you anywhere near a detached home in the 416, and for many, condos aren’t the answer. So first-timers are being forced out, trading downtown rents for ownership and more room farther from the core for the same monthly amount.
In town, the hottest properties for this group are homes in the $500,000 to $1 million range, configured “in a way that you can rent them out” — duplexes or triplexes.
As always, homes near transit and good schools command higher prices, though the definition of transit doesn’t necessarily mean the subway, he says. It includes GO trains and major arterial highways like the 407.
In 2015, Weisleder sees more of the same.
“If rates stay low and listings are scarce, then prices will hold.”
I agree. If you’re at the age and stage when it’s time to buy and you can be patient in any downturn, there’s not much to be gained from waiting.
Where 1st-time buyers get down payments:
- Savings: 40%
- Loans from banks: 27%
- RRSPs: 12%
- Gifts from parents: 11%
- Loans from parents: 7%
- Loans from employers: 1%
- Other: 2%
Source: CAAMP, Nov. 2014
Adam Mayers writes about investing and personal finance. Reach him at firstname.lastname@example.org