A recent CIBC report entitled, “Staying Put,” highlights an unexpected quirk in the ongoing boom in Canadian real estate.
While housing prices in most major centres have continued to rise, some houses – the most expensive ones – have risen in value far faster than low- and mid-priced housing. As a result, fewer Canadians are able to “move up” from their starter homes into their next, larger house.
A broken cycle
The trajectory most homeowners expect to make is typically at least a two-step process: as a young couple just starting out, you buy your first home and then, somewhere down the road as your family and financial well-being grow, you buy a bigger place to better accommodate your needs.
Some may repeat the process on the way to the top of their personal housing pyramid. Yet CIBC’s analysts have found that “there are many indications that this cycle that dominated the Canadian housing market for decades, is breaking.” And it’s actually breaking at both ends of the cycle.
For one, recently tightened mortgage regulations that pared back amortization periods from 40 years to a maximum of 25 years mean that with a more-compressed timeframe to pay off the mortgage, monthly carrying costs are higher. As a result, many would-be first-time homebuyers aren’t able to make the leap.
Homeownership rates for 25- to 35-year-old Canadians has dropped from 55% in 2012 to 50% today. CIBC’s analysis shows that the total number of sales of low- ($300,000 to $500,000) and mid-range ($500,000 to $800,000) homes have actually being dropping since 2010. The CIBC report does point out that the large numbers of lower-cost new condo units that continue to come onto the market have helped enable the transition from renter to homeowner.
The bigger change has been in the widening gap between the price of starter homes and the “next step” housing stock. Using the Toronto market as a case study, the report calculated that low-priced homes have gained about 30% in value since 2010, while high-priced homes ($1.2 million to $1.6 million) have jumped in value by 50%. In Vancouver, the skyrocketing “average” home price is almost exclusively attributed to the rising value of homes worth $1.1-million or more. With smaller gains in their currently occupied home, would-be movers are finding “the desired move up target is getting further and further out of reach.”
With next-step houses moving out of reach, rather than go through the hassle (changing schools, packing and unpacking your life) and expense (real estate commissions, lawyers’ fees, land transfer tax, etc.) of moving, many owners are renovating their existing homes instead.
Spending $50,000 on renovating an unfinished basement can add an additional 50% of living space to a standard two-storey home – and double your space in a bungalow. An addition can boost your footprint even further, but at greater cost and disruption to your life. But if your goal in renovating is to boost the sale value of your home, there are a few renovations that generally have a better rate of return (ROI) than others, and some projects you’re best to avoid.
For a straight flip, the best bang for your buck is to repaint your home. It’s low-cost, DIY-able, and is the easiest way to refresh some tired looking rooms. Kitchen and bathroom renos are the ones that typically yield that best ROI, often elevating a sale price beyond the cost of the improvement.
Even a low-budget kitchen or bathroom reno can help boost your sale price. On the other hand, some renovations rarely recoup the amount of money invested. Pools are costly, but many buyers would prefer to shy away from the maintenance and operating costs of an asset you can only use a few months out of the year. And while planting some new vegetation can burst the curb appeal of your home, pricey landscaping work won’t likely help you recoup the investment.