First-Time Buyers Can’t Save Down Payments Fast Enough to Keep Pace with House Prices

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.

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.