Is renting until you can save more money the sure-fire solution for an expensive housing market that it seems?
As a Toronto area real estate agent and a millennial, I wholeheartedly relate to complaints about Toronto’s expensive housing market, where it can be next to impossible for a twenty- or thirty-something-year-old to buy a first home.
I’ve seen it more and more over the past two years - young, hopeful, would-be-buyers coming into my office with their mortgage pre-approval in hand, excited to take the next step in their lives only to have a rude awakening.
Based on my experience, we can assume these buyers have somewhere in the ballpark of $50,000 saved up for a down-payment (of course, an almost impossible sum for the many millennials who don’t have financial help from family to rely on).
Assuming a median family income of $82,859 based on the 2016 Census (again, optimistic, given that many millennials are earning modest beginning to middle career range salaries) and taking into account current mortgage rules, these buyers may be able to qualify for a purchase price of roughly $350,000 to $400,000 (depending on other criteria and financial obligations such as student loan debts).
10 years ago this would have been a great budget for a starter home, but the story is a bit different today.
Here is a snapshot of all freehold sold properties on the MLS in Toronto under $425,000 for 2018:
Quite short, isn’t it?
And although there were five homes in the city that sold under this price point, the condition of these properties is another story, most being estate sales and homes sold in “as is” condition (normally the case of an long-time owner passing away, leaving behind a property that has not been renovated in some time).
Although the picture is quite different for Toronto-area condos, from the most recent sales we can see the majority falling under $425,000 are outside of the main core (and the ones in the core are typically small studio units that can be hard to obtain financing for):
So what’s a would-be-homebuyer to do? Let’s look at some of the more popular options:
1. Rent
Although renting until you can save more money to afford a more expensive home can seem like the safe (and only) option, it comes with its own set of pitfalls.
With a next to nothing vacancy rate, the Toronto rental market is itself expensive and fiercely competitive and multiple offers on rentals has now become the new norm, pushing rents up.
This means you could risk not being able to save enough to keep up with real estate market appreciation.
If you’re considering renting instead of buying, my suggestion would be to be realistic about the amount of rent you’d need to pay and the amount you would be able to save to ensure that the latter allows you to keep up with real estate market appreciation and inflation.
Once you are ready to buy in the future, you don't want to find that you’re further behind than you would have been if you had purchased a property earlier.
For example:
Property purchase price today: $400,000
Price appreciation (used for example only, not reflective of future appreciation): 3% per annum
Relative price of property after one year of renting (taking appreciation into account): $412,000
Amount you would need to save in one year to keep pace with the market: $12,000
What the above highly simplified example illustrates is that the amount of money you save must be greater than property price appreciation.
This may be doable in your situation, for example if you are able to keep your rent lower by renting in an older or less central location, but the point is that it is very important to think through these numbers carefully beforehand.
2. Buy a smaller condo in the core
Buying a smaller condo in the core could be a win-win situation - you’re able to start building equity, take advantage of any property price appreciation that occurs and live in your desired area.
However, one point of caution - in order to make this strategy work, you need to be realistic and clear about your short to long term life goals.
My advice to my clients is to think carefully about where you expect to see yourselves in the next five years, a critical period which allows enough time for your property to appreciate and offset the costs incurred when you buy a property (from agent fees to taxes). Many first-time buyers, particularly newly cohabiting couples, find themselves being crowded out of their homes far earlier than they’d expected as they start having children, pushing them to have to sell their property too quickly.
Another thing I ask my clients to think about over the next five years is whether their income levels may change - are their jobs stable in the case of economic downturn? The real estate market is always full of ups and downs, but you only lose money in those down situations if you have to sell.
Making sure you’ve prepared for upcoming changes in your life before purchasing can help to safeguard your purchase and allow you to buy defensively.
3. Move out of the city
I’ve said it before and I’ll say it again - Toronto is expensive, especially for first-time home buyers. But considering a move out of the city doesn’t mean trading in your central neighbourhood for “boonies-style-living”.
Over the past two years, I have helped a considerable amount of people realize their home buying dreams in areas just outside the city.
Some of these areas, including Clarkson, Mississauga, and Bronte West, Oakville are still walkable, transit accessible, and in great school districts. They have festivals, beautiful parks, and amazing restaurants. In some more outlying areas, transit can even be faster and more reliable than in more central locations. Many of my clients hadn’t even considered moving out of the city until I showed them how much further their money could go in the surrounding GTA.
At the end of the day, you need to figure out what’s most important to you and then consider what strategy is going to help you achieve your goals. Do you actually like the benefits of city living or are you just afraid of commuting? Are you planning on any major life changes in the coming years? Is owning a home important to you or just another societal expectation that you couldn’t care less about?
Buying a home is a huge decision - make sure you are weighing all of your options before jumping in by looking at the pros, cons, and financial implications of your potential decisions.
Top image credit: TataGD
Nicole Harrington is a Sales Representative with Realosophy Realty Inc. in Toronto. She specializes in using data and analytics to help her clients make smarter real estate decisions, concentrating on Toronto and the GTA, and hosts her own website: clarksonvillagerealestate.com.