According to a study carried out by the Altus Group, 4 in 10 housing purchases in Canada are by millennial buyers-- which is the same demographic considered the “broke generation”. So this begs the question: How are they getting off the sidelines and getting into the homeownership market?
With down payments of even 5% being a lot for the average millennial’s income, how are they affording new condos in the GTA? Do these buyers have tens of thousands of dollars stashed somewhere? Do some of them have a fairy godmother to wave her wand and grant them all their financial wishes? I’m quite certain they do not.
The short answer is that millenials are buying pre-construction condos as one way to get into the market, TREB reports. While the long answer is smart and strategic purchasing in various ways beyond budgeting, planning and general financial responsibility. Savvy millennials are beginning to think like investors.
Buying pre-construction is popular among this generation because they can invest in housing now and three to five years later when the building is complete, they can close. If they require immediate housing, but cannot afford to buy within the city, they can invest in one of the many urbanizing suburbs, wait a few years, cash out and move to their preferred neighbourhood.
In a rocky real estate market, millennials are still buying. Here’s a list of the few ways millennials are affording new condos in the GTA.
Co-Purchasing With Friends Or Relatives
This creative route to home ownership resembles the popular roommate concept seen in tight rental markets. Friends and family members are shacking up to split the cost of down payments, closing costs, maintenance fees and monthly mortgages. Faced with high home prices in big cities and tougher mortgage rules, the fact is that it is becoming increasingly difficult for millennials to get their foot in the door of the real estate market.
When considering co-ownership, it doesn’t necessarily have to be with a spouse or a romantic partner. It can be a sister, brother, uncle, aunt, or friend. Both buyers are on the property title therefore, both buyers are responsible for paying the mortgage on time and in full. If either partner is unable to pay their respective share, it could affect the credit score of both parties, which will affect the possibility of either party eventually owning another property on their own or with someone else-- so it's pretty obvious that buying with a trustworthy person is important.
This type of ownership should be treated as a business arrangement by having a lawyer draft up an agreement so both sides are protected. Also, this type of living arrangement is likely not permanent, so an agreement is set in place for when both parties decide to sell.
Lastly, buying with a partner is especially beneficial when it comes to qualifying for a mortgage. Two major factors that lenders consider when qualifying buyers with a mortgage are income and down payment. Saving a sizeable down payment is tough, especially for millennials living in Toronto where rents are sky high-- the average working millennial will pay $2000/month on rent before purchasing a home. It’s also more challenging to qualify for a mortgage on a single income. That’s why buying with a partner has become one of the top ways millennials are affording to buy a home in today’s market.
Bank Of Mom And Dad
This offering is the gift of all gifts when moms, dads, grandmas, grandpas, aunts or uncles “gift” the millennials in their lives with the funds for their down payments. Now, this may seem like a stretch but some might say that the “bank of mom and dad” is stabilizing Canadian real estate prices. We know for a fact that Baby Boomers are the wealthiest cohort and much of that money is being transferred to children and grandchildren. Economists are calling this shift of financial assets the “great wealth transfer”.
Many Boomers are looking for creative ways to transfer their wealth to their children and grandchildren in ways that will enrich the lives of their heirs. To date, one of the best investments continues to be real estate. As you know or may not know, few assets build equity and appreciate as well as real estate, especially in the Greater Toronto Area (GTA). Even in rocky times, home prices in Toronto appreciated by more than 5.4%, according to the Toronto Real Estate Board (TREB). For example, a 2018 report by RE/MAX found that Toronto-area homes prices increased 119% between 2007 and 2017. The average condo price in the GTA in 2007 was $230,000, while the average condo price in the GTA at the end of 2018 was approximately $603,480, according to the report.
With tough mortgage requirements from the bank and high rents, for many, getting money from parents and grandparents for a down payment is the best chance millennials have for entering today’s real estate market.
The prime rate in Canada is currently 3.95%. This rate is also known as the prime lending rate which is the annual interest rate major Canadian banks and financial institutions use to set interest rates for variable loans, lines of credit and variable-rate mortgages.
Whether borrowing from a mortgage company or a bank, financial institutions offer a wide range of loan products to help fund home purchases. So although data from a TransUnion report shows millennial mortgages fell by 19.5 per cent between the last quarter of 2017 and the first quarter of 2018, borrowing money from a financial institution is still the most common way for millennials to purchase real estate.
Unfortunately, we're in an era where millennials are labelled the "broke generation". If they are today's home buyers, it doesn't help that tougher mortgage rules have shrunk their home buying budgets by 16 per cent, or just above $40,103. Nor does it help that home prices are unattainable for most young adults, but 2019 might rewind the clock on the OSFI-mandated stress test. Recent headlines suggest that the two per cent point mortgage stress test may be revisited. Millennials must still have proof of stable income and exceptional credit to qualify for funding in this way but, it may open their budgets up to more options.
The federal government’s Home Buyer’s Plan enables Canadian residents to use up to $25,000 of their RRSP savings towards the down payment on a home. If each person in a couple has RRSP savings, that could very well add up to $50,000.
To take advantage of this plan, of course, one would have to qualify as a first-time buyer, and the RRSP funds would have to have been in the account for at least 90 days. Additionally, the home has to qualify and one must pay back the funds in 15 years.
First-time home buyers, which is largely comprised of millennials, may also qualify for a refund of all or part of the land transfer tax. As of January 1, 2017, first-time buyers pay no land transfer tax on the first $368,000 of the value. For those who make a larger purchase would receive a maximum refund of $4,000. Sounds simple right? Well, there’s more to it as stipulations do apply. It's always best to read through the government plans or speak to a lawyer who specializes in real estate to clarify all the details.
Pre-construction condos serve as an extremely viable option for millennials, especially during the VIP platinum access phase. While a down payment of 15% to 25% is required to secure a suite, what’s great about buying pre-construction is that the down payment is paid out over time. There is no need to have all the funds together at once-- and extended deposit structures are a great bonus, but we will get into that later.
As the continuing trend of condos is becoming increasingly unaffordable for many millennials, buyer incentives serve as a way to cut costs, extend deposit deadlines, and offers access to the best floor plans, all while saving anywhere from $10,000 to $30,000 on any given unit.
Buying pre-construction means having financial incentive options which can cut out fees and out-of-pocket costs that can eat into budget funds. If a millennial has $50,000 saved, that could be a 20% down payment on a $250,000 condo. If out of pocket fees and costs are going to development levies (for example), at $10,000, the savings that can be used for the property is actually only $40,000-- this means that the budget is now $200,000. The best incentives cut and limit fees, which are great because there aren’t surprise costs that change calculations. This also means that the fee money can be put into the deposit, which equals to more buying power.
Millennials who are looking for a home that is easier on their wallets are privy to deeper savings when purchasing pre-construction as incentives like free parking, lockers, and developer specials like 10% down deposit programs can help make the purchase more affordable.
Now, remember a little something called extended deposit structures? Well, every developer has different conditions in its contract. It is possible that some developers may only require 15% of the purchase price in deposits while others require 25%. When it comes to deposit structures, flexibility can vary too. When a project is first announced, there may not be a lot of leeway with the deposit structure but as the project nears sold out status, developers may be willing to extend some deadlines.