The psychological toll of a red-hot housing market

The homebuying process today is overwhelming, exhausting, and in some cases, plain heart-breaking. As many homebuyers’ down payment savings grow, so too do home prices, which can feel like one step forward and two steps back.

Sadly, this may not be the most gruelling part. In 2022, it’s not unusual for young buyers trying to get into the market to make tens of bids before purchasing their first properties — often at a price significantly over asking and with a song and dance (not literally, but compelling letters and videos are the new normal).

No matter how prepared you are, fierce bidding wars don’t make it any easier. For some, their competitive nature or desire to own can drive them to make hasty decisions. For others, particularly in popular metropolitan areas, housing prices outpace affordability, leaving many to feel discouraged at ownership prospects altogether.

Needless to say, getting into the housing market these days can take a psychological toll, especially when it involves significant debt, such as a mortgage on a million-dollar home. We look at four buyer profiles to see what is fuelling this financial stress and possible solutions to consider.

The prospective first-time homebuyer

Rona Birenbaum, certified financial planner and founder of Caring for Clients, a fee-only financial planning and wealth management firm in Toronto, says she sees tensions arise in the first-time buyer demographic, with people expressing feelings of frustration and an overall sense of giving up.

“There is something very depressing about that mindset that can, unfortunately, colour one’s world,” she says. It can be hard to be surrounded by real estate talk or see what friends or friends of friends are doing on social media, for example. Real estate is everywhere, all the time.

“I see real psychological toll worth talking about within this group because they need a real answer to the question, ‘well if not homeownership, then what?’”

A 2022 poll from the Ontario Real Estate Association (OREA) suggests that 40% of parents of homeowners aged 18-38 have helped their children financially when they purchased a property. On average, the financial gift totalled more than $70,000. But not everyone has this option.

If a homebuyer is fortunate to receive a financial gift, however, it may come with a caveat: parental guidance.

“The biggest piece of advice we have for first-time homebuyers is to listen to that local expert,” says Michelle Terzis, real estate broker at Keller Williams Realty Centres, Brokerage, in Newmarket, Ont. This could include your real estate agent, mortgage broker or agent, financial adviser, or other professionals with knowledge of the market in your region.

First-time homebuyers in their late 20s and early 30s are experiencing a completely different housing market than their parents might have seen at the same age. For instance, in the 1980s, interest rates were at an all-time high, but the average home price was just $67,000, according to the Canadian Real Estate Association (CREA). In February 2022, the average home price was a record $816,720 — a 20% down payment on this purchase price is $163,344 alone, more than double the average home price in the early 1980s.

“Now, with interest rates being so low and prices being so high, [first-time homebuyers] are not in the same position as their parents were,” Terzis explains. “Getting advice from a parent, I see sometimes, hinders buyers’ journeys. The reality is: times have changed. Make sure you are fully informed on today versus 20 years ago.”

The homeowner who bit off more than they can chew

If you react too quickly and purchase a property beyond your means, you could wake up in a cold sweat thinking about your mortgage. In this case, there’s a good chance you may have taken on too much debt.

“The only people that are going to be in this situation are those that didn’t do a thorough analysis before heading into this purchase,” says Birenbaum. “When Canadians rely exclusively on their realtor and their lender for affordability advice, they are setting themselves up for a potential problem,” she says.

British Columbia is the first province in Canada working to mitigate reactive buying behaviour by introducing a “cooling off period” for homebuyers. The amendment to the Property Law Act will allow buyers more time to consider their offer, arrange for a home inspection, and lock in financing. While the province already has a similar act for new construction buildings — allowing buyers seven days to reconsider their decisions — the proposed amendment balances buyers' risk when purchasing an existing property.

Only you, the buyer, will have the complete picture of your financial affairs. And if you don’t, a financial planner can assist you. The Homebuying Step by Step: Workbook and Checklists from the Canadian Mortgage and Housing Corporation (CMHC) is another tool that can help you determine an appropriate budget for your lifestyle based on your habits.

While your lender will allow you to borrow a certain amount of money, buying a house at the top of this threshold is not always recommended, as you don’t want to end up house poor. It’s important to scrutinize your cash flow to avoid buyer’s remorse.

“Regret is not a helpful use of anybody’s energy,” says Birenbaum. “If it were such a big mistake that you will inevitably build up so much consumer debt on the side to make ends meet and will be forced to make a decision around the property in a year or two, sometimes it’s just better to reverse course.”

If you need to sell your property, you’ll need to find a buyer, and there is usually a 60- to 90-day closing period. It takes time and can be costly with potential mortgage penalties, lawyer fees, and real estate commissions. But, in the end, it might be the price to pay to get out of financial trouble. Seek help at the first signs of strain and speak to your lender for options.

The established homeowner looking for a recreational property

Then there is the established homeowner — the person who has potentially paid off their mortgage and is sitting on substantial home equity in a seller’s market. Approaching retirement or enjoying their golden years, those in this demographic might consider acting on the dream of owning a recreational property like a cottage or a secondary home.

“A lot of these buyers have been in their current homes for 10, 20, 30, 40 years, in some cases, so they have to adapt to the new market that they haven’t experienced before,” says Terzis. “Sometimes, people pull out when they notice that there is more risk. When they see the reality of the prices, they pull back and recognize that maybe [a second home] is a want, not a need.”

People aged 50 and older usually fit into this group, and issues can arise with taking on new debt when they potentially have none or are soon to be mortgage-free. Often, couples have varying perspectives regarding both the financial and physical demands of owning a waterfront or recreational property.

Birenbaum suggests, “The way you at least begin to resolve those differences is through a detailed financial planning exercise that answers the question, ‘is this a disaster waiting to happen or not?’”

She remarks that seeing the numbers in black and white from an objective third party is sometimes the only thing that will help a couple get past the conflict. In many instances, the reality of the situation can deter homebuyers from taking the next step.

According to RE/MAX, recreational property sale prices skyrocketed during the pandemic. In the Rideau Lakes area, for example, the average price jumped by more than 220% between 2019-2022. While 57% of Canadian recreational markets include properties listed within the $200k-$500k price range, cottage shoppers can expect prices nearing $2 million for a waterfront property in the Muskoka region. Often, retirement incomes do not support secondary home purchases of this magnitude.

The would-be property investor looking for an income property

The final group is the would-be investor, someone looking to purchase a property while mortgage rates are low or an appealing pre-build payment structure is available, without the intention of actually living in the home.

“I’m starting to see now, everyday people — not aggressive or sophisticated investors — start to say, ‘well, there is this new build. I just have to get $50,000 over the next three years and then when it comes time, when it’s ready, I’ll flip it,’” says Birenbaum.

The idea is that the property would appreciate even before occupancy, and closing the deal would be easy. “That’s a potential recipe for some significant stress if things don’t play out ideally.”

Three or five years — whatever it may be — is a long time in real estate. If home prices drop before the home is ready to sell, what are your options? Will you take on the responsibility of the landlord and rent out your property? Otherwise, you could take a loss if you were to sell. Consider all variables, including the long-term possibilities, before jumping into such a commitment.

Home prices in the Greater Toronto Area (GTA) grew by 28% from 2021. In Toronto specifically, the average detached house price surpassed $2 million in February, and the lack of supply continues to drive prices up. As the stock market faces volatility and the Russian invasion of Ukraine creates uncertainty, people are looking to real estate since the market continues to climb month over month.

“What goes up must come down eventually,” warns Terzis. “Have a game plan in place.”

An investment property can be lucrative for those with the reserves and funds to hold on to the property. Investors can do this by renting the space to break even with the mortgage; however, it can be an added stress if you cannot cover costs.

“If you are not in a position to hold on to a property, then it might not be for you in a short-term perspective,” says Terzis. “As long as you can hold on to the investment long-term, it’s proven it will go up over time.” How long that will be, however, is unforeseeable.

Questions to ask yourself before jumping into homeownership

“Financial stress comes when you have bitten off more than you can chew because you didn’t realize there was going to be a second course, and a third course, and a fourth course to this meal,” advises Birenbaum. “If you haven’t made the mortgage commitment, now is the opportunity to do that homework.”

Model out some scenarios and ask yourself questions, such as:

• What happens if and when mortgage rates rise? The Bank of Canada embarked on its first rate hike since 2018, with interest rates projected to rise further, exceeding pre-pandemic levels by the end of the year.
• What if your career changes? Can you still afford your mortgage payments on a lower salary?
• You plan to have a child in two years; what does your cash flow look like during maternity or paternity leave or daycare expenses?
• How much debt are you comfortable with?
• Will you have the budget to address financial emergencies?

“It’s about looking forward to see where you might get squeezed in the future,” says Birenbaum. “What could we be doing now to mitigate the risks?”

A life insurance policy, for example, is an excellent way to provide financial support to your loved ones if you die, ensuring they can afford the mortgage payments to maintain their lifestyle.

“‘Can we afford it in good times, and can we afford it in bad times?’” Birenbaum recommends asking yourself. “To the degree in which you can insure against the bad times, you do, and of course, some risks are just a part of life.”