Young homebuyers left behind in housing boom

First-time buyers struggle to find affordable housing in Toronto's inflated market

Many millennials may soon be forced to say goodbye to Toronto in their search for a home.

Over the past few years, Toronto’s housing prices have inflated like a hot air balloon, leaving many first-time buyers priced out of the market.

“The first day we had our price range set but everything we looked at was basically garbage,” first-time homebuyer Megan Myke said.

“We ended up having to scrap everything, go back to the drawing board, and rediscover what we would actually be able to afford, then raise our price range by 50,000 minimum and start looking again.”

Myke eventually left Toronto and settled down in Hamilton this summer.

“We wanted to start a family, but buying a house in Toronto was just prohibitively expensive,” Myke said. “There was no way that that was going to be an option for us, so we knew that we definitely had to look outside of Toronto to find something that we could afford.”

The difficulties Myke experienced are common in the Greater Toronto Area. With buyers laying down sky-high offers for homes which are consistently sold over asking, the financial requirement to buy a house here is quickly rising.

According to the Canadian Real Estate Association, the average price of a home in Toronto increased by 20.5 per cent in September compared to the same month last year.

There are three main reasons for Toronto’s housing boom, says Larry Cai, owner of RE/MAX Imperial Realty brokerage.

“The interest rates are at a historical low, immigrants from around the world gather in Toronto, and foreign buyers see the housing market as a valuable investment opportunity,” Cai said.

In response to the rapidly escalating prices, the government recently took steps to cool the market by making changes to the mortgage rules and closing a tax loophole for foreign investors.

Buyers taking out a five-year mortgage with less than 20 per cent down will now have to undergo a stress test, which calculates the borrower’s ability to repay their loan based on a qualifying rate of 4.64 per cent.

“They feel that if they make it more difficult for people to qualify, that might slow down the market which has been increasing at an exponential basis for the last few years,” said Matthew McKillen, broker at Mortgage Architects.

“Also, if clients are purchasing properties now, when their mortgages come up for renewal in five years and interest rates are much higher, there’s concern if they’ll be able to afford the payment increase,” McKillen said.

While this was an attempt by the government to ensure the stability of the housing market, it left young buyers disgruntled.

“It’s the first-time buyers who are going to be penalized by this,” McKillen said. “There have been buyers that I had pre-approved whom I’ve had to re-contact and restructure their financing because they did not find a home in time, and some of my clients are very disappointed in regards to the maximum mortgage they can qualify for today.”

Myke got a five year mortgage with TD at a fixed rate of 2.49 with a 15 per cent down payment. If the mortgage rules had come into effect when she was still searching for her home, she would not have been able to qualify for the same amount.

“Just being able to find a house, once you hammer down all the details as to what you want and you can pay, is such an emotionally draining and difficult process to go through, and to get to the end of it and have the rug pulled out from under you, I can’t even imagine,” she said.

While these changes make it substantially harder for residents to buy their first home, it leaves new immigrants and foreign buyers — who have become a concern for many local buyers — virtually untouched.

“They don’t really care because they can afford to pay 35 per cent down payment or more,” Cai said.

Myke believes that the influx of foreign investors is a major contributing factor to the heated Toronto housing market, and calls for regulations around their buying habits.

“A lot of people want to be able to buy a house and settle down, but it’s really hard to do that [because of foreign buyers],” Myke said. “I’m looking at my friends and colleagues who are still living in Toronto and even just trying to buy condos, the prices and bidding wars are just obscene. It’s no good for anybody.”

Then on Oct. 26, the Canada Mortgage and Housing Corporation (CMHC) issued a warning for Toronto and three other cities.

“Home prices have risen ahead of economic fundamentals such as personal disposable income and population growth, resulting in overvaluation in many Canadian housing markets,” the CMHC said.

However, the warning was tempered with an optimistic outlook.

“Growth in house prices will slow and housing starts are expected to moderate in 2017 and 2018,” chief economist Bob Dugan said.

Cai doesn’t believe that will happen in Toronto. He doesn’t see the housing prices in Toronto decreasing for at least another five years.

“The government may look at limiting and regulating purchases of second and third homes which would deter investment and decrease demand without being unfair to the first-time buyers,” Cai said.

Until that or a change of similar magnitude happens, young prospective homebuyers may find themselves out of luck in Toronto.