The Forgotten New Homeowners

If you want to buy a standard two-story home in Canada, you will need to have a household income of almost $88,000 to afford it.

That’s according to the recent RBC Housing Trends and Affordability report. That shows the average cost, of this type of 1500 square foot home is $393,100 in Canada.

These continued high prices are pushing one particular group of people out of the housing market, Canada’s youth.

A young 28 colleague told me recently, although she has a fantastic career and a great salary, she can’t afford to buy a home in Toronto. The average cost of a two-story there is $586,600. The situation is worse in Vancouver where the average cost of that same house is a whopping $843,300.

The long-term implications of what’s happening right now are mammoth and here’s why.

Unemployment among Canadian youth is almost double the national average at 14 percent. Young people entering the job market are faced with more competition, lower salaries and less permanent job prospects.  New grads are taking part time work, temporary and contract positions just to get by. Homeownership according to many under 30 is “the last thing on their mind.”

An extended period of ultra-low mortgage rates, are also to blame. Canadians are in more debt then ever before, because it’s so cheap to borrow money. And that is discouraging people to save.

To make it worse its encouraging those who can’t afford it, to get into more expensive homes and drive the price of housing up artificially. Because, when rates return to normal many people will be unable to afford their new purchases.

But arguably, that could take years and leaves a core group of people between the ages of 25 to 30 waiting to buy a home.  Once rates start to rise, prices will inevitably come down, but by then a new group of first time homebuyers will be in the market and competing with the group that got left behind.

This could lead to another surge in prices driven by high demand.

In my opinion this is when we will see the “pop” in the proverbial housing bubble.  When pent up demand starts to trump reasonable thought.

Right now, the housing market is being driving mostly by people moving into larger homes or looking to make a quick profit by flipping a property.

But this current group of buyers isn’t being lead by desperation. They just want to have more space or make money.

In contrast years from now we could see people, who have been waiting for a decade to buy their first home, make rash decisions. Embroiled in a fierce bidding war, some might borrow more just to finally get into their dream house.

It’s that kind of emotion that drives prices out of control, regardless of interest rates.

When this happens, I would encourage everyone to recall the U.S. housing crisis, to understand what emotional buying can do to a nation.  American lenders are just as much to blame for allowing money to get into the hands of people who couldn’t afford it. But, the ultimate decision to take more debt and drive prices up was the buyers of real estate.

Most experts, including me, were expecting a rate hike by September 2011. But that has all changed.

RBC says with, “the renewed turmoil in global financial markets and heightened uncertainty about the pace of global growth”, their call for a future rate hike is not until mid 2012.  I wouldn’t be surprised if it happened later, towards the end of that year. Giving more time for Canadians to enjoy the cheap money party.

Your home is your biggest investment and it’s a shame that not everyone has a right to that security.

To end on a sombre note. This week Canadians lost Jack Layton, the leader of the Federal NDP party and a champion of affordable housing for everyone.

I hope when Canada’s top bankers meet to discuss housing affordability in Canada, they consider the young people that are getting left behind. Those who want to be responsible home owners but because of the higher prices can’t.  Maybe this might help shape a decision or policy that in the end could be better for one of Canada’s most vulnerable groups. Canada’s youth.

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Related Topics

Buying A Home / Mortgages

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