Here’s something that will surprise very few. Canada’s parabolic rise in home values is killing the dream of homeownership for young Canadians.
The numbers say it all.
More than a third of non-homeowners under the age of 40 — 36% to be exact — claim they’ve given up on ever owning a home. That’s the key finding of a new RBC survey, which illustrates the struggle young non-owners face.
As young people diligently try to sock away down payment funds, home prices just keep rising — for some, right out of their reach.
What’s more, well over half of Canadians (61%) expect prices to continue climbing.
By February, average home prices in Canada had jumped a whopping $135,607, or 25% year-over-year (Source: Canadian Real Estate Association).
That means average prices are rising more than $10,000 a month.
Meanwhile, the 60% of non-homeowners who are likely to purchase in the next two years say they’re putting aside “just” $789 a month towards a future down payment.
To state the obvious, that’s a problem — especially given a recent Scotiabank survey confirmed that:
- personal savings is the #1 way Canadians plan to finance their down payment (49% of Canadians)
- #2 was using equity from their primary home (33%)
- #3 was taking money out of investments, e.g., an RRSP or TFSA (33%; which partially overlaps with #1).
Calculating the rising mortgage hurdle
Here’s another view of how skyrocketing home price growth has hit mortgage affordability:
February 2020
- Average home price: $542,484
- Minimum insured down payment (5.3%): $29,248
- Monthly mortgage payment at 1.79%: $2,122
February 2021
- Average home price: $678,091 (+$135,607)
- Minimum insured down payment (6.3%): $42,809 (+$13,561)
- Monthly mortgage payment at 1.79%: $2,626 (+$504 per month)
*Interest rates used are the current lowest widely available insured mortgage rates quoted on RATESDOTCA. Assumes a 25-year amortization.
In other words, your typical prospective homeowner who saves $9,468 a year is not saving nearly enough to keep pace with rising down payment minimums.
What’s more, those surging home prices will cost buyers over $32,000 more interest over the life of their loan, assuming rates stay the same.
Rates are based on a home value of $400,000
Higher mortgage hurdle for home prices above $500k
Compounding the down payment struggle is a 2015 Department of Finance rule change. That change required that borrowers put down 10% of the purchase price that is over the half-million-dollar mark. Prior to that, the minimum down payment applied to the entire purchase price up to $1 million.
Now that average home prices have crossed this $500,00 threshold, a growing percentage of buyers are having to come up with meaningfully larger down payments. To date, regulators have refused to index either that $500,000 level or the $1 million ceiling (above which 20% down is required on the entire purchase price) with home price inflation.
