July 13, 2016

Buyer Gridlock Leading to a Lack of Supply for First-Time Homebuyers

Anyone who’s read the news lately has probably come across the term “buyer gridlock.” Not to be confused with traffic gridlock, buyer gridlock refers to those who already own a home and are looking to move up in the real estate market, but can’t due to tight supply. For example, if you’re planning to start a family and you’re living in a cramped two-bedroom bungalow, you may want to trade up in the market to a more spacious two-story detached house.

This is often easier said than done. Tight real estate supply in Toronto and Vancouver is causing many homeowners to stay put and renovate their homes instead of moving. To put this into perspective, real estate listings in Vancouver are down a whopping 40% in the last year alone. Real estate in Toronto is not quite as bad. Listings are only down 3.7% in the last year, although they’re down about 50% since 2008.

The lack of listings is making it challenging for first-time homebuyers to enter the market as well. Tight supply means bidding wars are the norm rather than the exception. While it’s nice to be a seller in a seller’s market, if you’re planning on upsizing, you’ll once again be a buyer and face the consequence of tight supply, which could mean paying more for a home that isn’t exactly your idea of a dream home.

Homeowners renovating instead of moving

A combination of low interest rates and tight supply is leading Canadians to spend a record amount on home renovations. Why move down the street and spend, say, $100K on closing costs to buy a “slightly better” home when you can stay put and renovate the home you already own? Home renovation spending has been trending upward for years, reaching a record $63.4 billion in 2013. If you own a bungalow, you can add a second storey for your growing family instead of moving.

A lack of land to develop is another reason why home prices have been skyrocketing. The supply of new homes in GTA has been limited by development restrictions in the Greenbelt, leading to home prices been pushed even higher. Vancouver, surrounded by mountains, faces a similar problem.

Buyers in Toronto face a unique situation. Toronto has the dubious honour of being the only city home to a municipal land transfer tax. Homebuyers are faced with a double-whammy of land transfer taxes. You have to pay a municipal and provincial land transfer tax when buying a home in Toronto. This has likely only encouraged more homeowners to stay put.

Baby boomers not downsizing as planned

The lack of baby boomers downsizing is another thing contributing to the lack of supply. It was predicted baby boomers would downsize in large numbers. Boomers would sell their detached family homes and downsize to condo living. Unfortunately, in many cases, this isn’t happening. Nearly half of baby boomers who are considering moving don’t intend to downsize, finds a poll for Royal LePage Real Estate.

I know about this situation first-hand. My father and step-mother own a two-storey detached in the trendy Beach neighbourhood in Toronto. The kids have long grown up and moved out. My dad and step-mom could easily sell their home and make a mint, but they don’t want to; they enjoy the neighbourhood they live in. They have a lot of friends and are part of the church. This is a similar story to the one I hear from a lot of boomers.

What’s a first-time homebuyer to do?

Hearing about buyer gridlock can be discouraging for first-time homebuyers already grappling with skyrocketing home prices in Toronto and Vancouver. If there’s a silver lining, it’s that there’s still hope for those buying a home for the first time.

To avoid home-buying disappointment, set realistic expectations. With the average price of a detached home over $1 million in Toronto and Vancouver, it’s not realistic to expect to buy a detached home in your dream neighbourhood right away. However, there are plenty of fantastic, affordable options out there.

If you don’t mind the longer commute, your home-buying dollar is typically stretched further in the suburbs. You can usually buy a bigger home on a more spacious lot in the suburbs than you otherwise could afford in the city. In fact, buying a home in the suburbs could prove a better long-term investment. Price appreciation in the 905 region has been outpacing the City of Toronto proper.

If you want to stay in the city, pre-construction condos are worth considering. Developers are building condos to suit the needs of all different kinds of buyers. For those who don’t mind a lack of space, there are micro condos under 500 square feet. Condo living is typically seen for only singles and couples, but larger condos are being built to accommodate those thinking of starting a family.

The bottom line is a home is still a great long-term investment. Try to find a home that works for your budget, get your foot in the door, and start building equity today.

Flickr: Marcela Andrade