Let’s face it. Anything you read about millennials and homeownership in Canada over the past few years has felt, well, pretty doom and gloom. With housing prices spiralling out of control in Canada’s largest cities for much of the past decade, the statistics certainly aren’t in favour of what is now Canada’s largest generation.
As with most things, however, if you dig a bit deeper, there are positive signs, not to mention opportunities, for millennials looking to purchase a home. Before we get to the silver lining, let’s take a look at the cold, hard numbers.
Housing Affordability By The Numbers
The numbers don’t lie. Recent reports have shown that for a millennial to afford an average home in Vancouver and Toronto, they’d require an annual income of $200,000 and $150,000, respectively. And mortgage affordability is just one piece of the puzzle. At current savings rates, it’s estimated that the average millennial needs 29 years to save up for a 20% down payment on a home in Vancouver and 21 years in Toronto.
Of course, millennials residing in other provinces are faring better. Housing prices are much lower in provinces such as Saskatchewan and Manitoba, as well as the Maritimes, making the dream more of a reality in many areas of the country. In Manitoba and New Brunswick, for example, a 20% down payment could be saved in 8 and 5 years, respectively. In other words, when you remove Toronto and Vancouver from the equation, the situation doesn’t look so bad. Of course, there are an awful lot of millennials living in those two cities.
Home Ownership Is Important To Millennials
Regardless of the current state, studies have shown that homeownership is very important to millennials. In fact, a recent poll by KPMG found that buying a home remains a major goal for 72% of Canadians between the ages of 23 and 38. Thankfully, there are opportunities for millennials trying to get into the housing market. Here’s a look at some of what’s available to Canadian home buyers in 2020.
Historically Low Interest Rates
Although housing prices have held steady in most parts of the country, interest rates remain very low. At the time of this writing, the best 5-year fixed mortgage rates available from most lenders remain under 3%, while adjustable rate mortgages (ARMs) are even lower, thanks to recent reductions in the Bank of Canada prime lending rate. Favourable interest rates can result in huge improvements in mortgage affordability. For example, on a $300,000 mortgage, an interest rate reduction of just 1% equates to a savings of $250 each month, or $3,000 per year.
First-Time Home Buyer Incentive
The Canadian government has begun to address mortgage affordability in the past year through the introduction of a new home buyers’ program. The First-Time Home Buyer Incentive is designed to reduce a borrower’s monthly mortgage payment amount without the requirement of a larger down payment through a shared equity mortgage.
Home Buyer’s Plan (HBP)
The Home Buyer’s Plan has been around for many years, enabling millennials to borrow from their registered retirement savings plans (RRSP) without penalty to put toward the purchase of a home. In 2019, the maximum RRSP withdrawal amount was increased from $25,000 to $35,000, making it easier for millennials to come up with the required funds.
Tax-Free Savings Account Benefits
In addition to RRSPs, millennials now have another tax-sheltered savings vehicle to help them reach their goals of homeownership. The Tax-Free Savings Account (TFSA) has been around for more than 10 years, but more and more millennials are taking advantage of the flexibility offered by this government registered investment. Each year, you’re able to contribute $6,000 and invest the funds any way you’d like. The beauty of the TFSA is that there are no penalties when it’s time to withdraw, and you can use the funds for any purpose. This makes for a great way to boost your savings over and above your RRSP contributions.
Tips For Reaching Your Homeownership Goal
While new opportunities exist to help Canadian millennials fulfil their dreams of homeownership, the journey can still be a long and difficult one. Here are a few things to consider along the way.
We live in a society that’s not used to waiting, we want to have everything now. Unfortunately, that approach isn’t going to work when it comes to buying your first home in a high cost of living area – such as Toronto or Vancouver. It’s important to acknowledge that this journey will take time, and that’s OK. Every thousand dollars you save brings you a step closer to your homeownership dream.
If you’re willing to be flexible when it comes to location, you may consider moving to a lower cost of living area to make your homeownership dream a reality. While this isn’t feasible for everyone, remember that there are many areas in Canada where housing remains relatively affordable. If you can find similar employment opportunities, you may enjoy a better quality of life in a place where your dollar stretches farther.
As you save to buy your first home, take the time to do the proper research. Understand the housing market where you live and make yourself familiar with the programs that are available, such as the ones covered above. When you’re ready, speak to your mortgage advisor or a mortgage broker about getting prequalified. You know how the saying goes: “Knowledge is power.” The more educated you are on the home buying process, the faster you’ll be able to reach your goal.
While homeownership is a noble goal, it’s not the ideal solution for everyone. In fact, there are times when renting may be the better choice. If you do decide to buy instead of rent, make sure you don’t buy more house than you can afford. Stretching your mortgage affordability to the limit can result in an enormous financial burden, leaving you unable to reach other important financial milestones.
Final Thoughts On Homeownership And Millennials
This article’s aim was to avoid focusing solely on the statistics of millennials and homeownership. Remember to look past the negatives and find the silver lining that most definitely exists. While headwinds remain, there is plenty to be positive about. Whether it’s ongoing low interest rates or the introduction of government programs designed to improve home affordability, millennials have something to feel good about in 2020.
Tom Drake is an authority in Canadian personal finance. He is a financial analyst and has been writing about personal finance since 2009 at the award-winning MapleMoney. His work has appeared in MintLife, Canadian MoneySaver, and U.S. News & World Report, and has been quoted in The Globe and Mail, Yahoo Finance, and Financial Post.