Today’s housing market is hardly a cakewalk. As prices spiral ever higher and new rules limit borrowing options, it can be argued that homeownership is among the toughest life milestones for millennials.
To discuss these pressing issues, Zoocasa Realty CEO and Broker of Record Lauren Haw joined fellow real estate pundits Rob Carrick (The Globe and Mail) and Romana King (MoneySense) on a housing panel hosted by the third annual Canadian Personal Finance Conference.
Together, they explored some of the most pressing challenges facing the market, and offered some expert advice for buyers and renters.
As any investing expert will preach, the key to a good investment is to buy low and sell high – but today’s market seems to defy gravity. Not only is it tough financially to get into today’s market, the threat of a real estate bubble – one that’s poised to burst at any time – can make buying a home seem a costly gamble.
However, the experts argue, viewing housing as an investment is part of the problem for average would-be homeowners. “According to top economists, one of the classic signs of a bubble is when housing moves from a place to live, to investment,” said Carrick.
King echoes that statement, saying that first-time buyers and move-up buyers represent a very different segment of the market than investors, yet they all have a significant impact on one another, driving demand and price out of reach. “If you’re talking about millennials who are trying to buy their first home, that’s an entirely different segment of investors. I think that’s the dilemma – you have people who just need a place to live, and they can’t find a rental place, or one in terms of purchasing.”
Haw adds that for those who do want to see a return on their real estate investment, a long-term approach is key – for at least 10 years.
“Some people may think of long-term as three years, but that’s really so short,” she says. “In those three years, all you’re really doing is repaying that appreciation into land transfer taxes when you sell, and we don’t want that for our clients.”
She says that many “flipper” investors – buyers who pick up properties, fix them up, and sell at a higher price – often underestimate the value of their time and efforts.
“It’s actually really hard to flip a home properly. Most people who do it are really just paying themselves for their time and don’t realize it.”
Issue 2: Do buyers need to change their expectations?
With the average detached house now fetching an average of $1.3 million in Toronto, buyers are having to reach deep into their debt options to afford their homeownership dreams. Combined with anxiety that prices will continue to grow, many are buying for the sake of getting into the market – a move Carrick says sets them up poorly for the future.
“There’s this idea in the marketplace of starter houses. And I think people are persuading themselves to ‘just get into the market’, and buy something. There are people buying two-bedroom houses, younger couples, and I’m thinking – ‘do you not think you’re going to have children?’. That house is going to be bursting at the seams in three years,” he says. “Nothing else matters to me except affordability. And it’s not just the mortgage payments – it’s all the other housing costs. It’s the cost of having kids, and the cost of paying daycare in Toronto, because that’s another mortgage payment right there. If you have a car, you’ll need to pay care insurance on it, and you’ll need two cars if you move to the suburbs.”
Haw adds that one good tactic for young buyers is to share their space, and open up part of their home for rent, as it helps offset mortgage payments, builds equity, and provides greater financial security during market fluctuations. “Something you could do is buy a home that’s a little too big for you, and put a basement apartment into it… be creative with how you use your living space now,” she says.
Issue 3: A Lack of Affordable Renting Options
A common nugget of wisdom for young buyers is to avoid rushing into the market, and to bide their time in a rental while saving a bigger down payment – but that advice doesn’t hold in up in today’s market where the competition for rentals can be just as fierce. Rental vacancy rates are extremely low in Toronto, at just 1.7%, according to the Canada Mortgage and Housing Corporation. As a result, home seekers are finding themselves in rental bidding wars, and paying thousands each month for units in downtown locations.
“I think the lack of rentals is a huge problem. You tell people, “don’t buy, you should rent until you can afford something,’ and they look into getting a rental, and they can’t find something, and spend months and months looking – it’s a huge problem,” says Carrick. “The rental solution was a no-brainer five years ago. Now you tell people to rent and it’s just impossible.”
Haw says that regulations changed decades ago are partly responsible for today’s lack of affordable housing.
“One problem about the rental situation in Toronto is around the mid 90s, they change the rules – they capped the rental increases that landlords could ask for in a year, so around that time, people stopped building rental buildings,” she says. “For developers, they couldn’t see the return and it didn’t make sense. It’s a situation where regulation came in and tried to help people by capping the rental rate increases, and instead they stopped building rental buildings. So, now we’ve got all these buildings being built, and then just sold – they’re not purpose rentals anymore, they’re condos.”
It also doesn’t help that many people view homeownership as a necessary part of the Canadian dream, eschewing rental options despite their affordability needs.
“Culturally, renting is like a filthy word – a former generational attitude is, ‘You’re just paying your landlord’s mortgage!’,” says Carrick. “But we’ve got to build up renting as a viable alternative. Right now, there’s not a lot of selection out there, and you’re going to have to look for months and months and maybe share for a while.”
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Penelope Graham is the Managing Editor at Zoocasa, and has over a decade of experience covering real estate, mortgage, and personal finance topics. Her commentary on the housing market is frequently featured on both national and local media outlets including BNN Bloomberg, CBC, The Toronto Star, National Post, and The Huffington Post. When not keeping an eye on Toronto's hot housing market, she can be found brunching in one of the city's many vibrant neighbourhoods, travelling abroad, or in the dance studio.