Senior wealth advisor outlines the challenges facing first-time homebuyers, and some alternative strategies to consider
For generations, one of the most significant milestones of early adulthood was to take the first step toward wealth accumulation through homeownership. But in today’s markets, that strategy is becoming tougher and tougher to follow.
“Traditionally, the path toward financial freedom depended on someone’s capacity to become house-rich, and of course to do that, they need to have a house or be able to afford one,” said David Semerak, senior financial advisor at Meridian. “And that’s the challenge that young Canadians are facing today.”
As Semerak noted, the high entry costs of homeownership are making it a dream that’s beyond the average young adult Canadian’s reach. While many expected the COVID-19 pandemic to dampen demand and lead to more rational residential property prices, the opposite has happened: low interest rates, increased savings, and windfalls through stocks and other paper investments have emboldened many buyers, catalysing more extreme valuations in urban centres as well as other markets.
“Many first-time homebuyers don’t realize that if they want to make a down payment of less than 20%, they need mortgage insurance, which typically they would get from the Canada Mortgage Housing Corporation,” he said. “But for house prices over a million dollars, that’s not even offered.”
For houses that cost more than a million dollars, Semerak noted, a homebuyer would need to be able to make a 20% down payment by themselves. That creates an additional challenge for many young adult Canadians who don’t have the means to come up with that $200,000.
And while borrowing costs are accommodative at the moment, nobody is expecting the historic lows in interest rates to persist forever. That means for millennials with large mortgages, whether fixed or variable, interest payments could rise by another couple of thousand dollars a year, eating up more – if not all – of their disposable income.
“I think COVID has really amplified companies’ adoption of virtual technologies, and that’s allowed many Canadians fresh out of college to get their first jobs without necessarily living in a downtown core,” Semerak said. “We’re seeing people move out of city centres and maybe go somewhere that’s a little less expensive.”
After simmering violently for years, housing prices have come to a metaphorical boil. Between the demand to relocate into the suburbs and low borrowing costs that allow people to qualify for larger mortgages, Semerak said prices are estimated to jump another 13% next year. That’s not even considering the additive impact on demand from immigration, which has been on hold for much of the pandemic.
With that in mind, he suggested that young Canadians should consider following a more sustainable path of wealth accumulation. For instance, he noted how in the past, the only way someone could save money and pull it out for a home purchase was through an RRSP using the Homebuyers Plan. But today, tax-free savings accounts offer a lot more flexibility.
“A lot of people believe that TFSAs are just for savings, but you can use it to invest in stocks, bonds, mutual funds, and other assets you feel comfortable with,” Semerak said. “Those in their early income-earning years can contribute to that regularly, and over time create a cache of wealth they can put towards a deposit on a house.”
People who want participate in housing-market gains, he added, don’t actually need to own a house. With real-estate investment trusts and other similar investment vehicles, investors can get some type of real-asset exposure within their TFSAs – plus the potential for dividends, depending on how the investment is structured – without having hundreds of thousands of dollars on hand.
Young Canadians who are simply unable to realistically afford today’s extreme prices, he added, may benefit from considering alternative living arrangements. The concept of the multi-generational household, which has long been embraced in many parts of the world, is starting to see limited adoption in Canada, with grandparents, parents, and children now building their wealth together under one roof.
“There’s also something to be said about renting,” Semerak said. “Young Canadians could rent a dwelling with some friends and acquaintances with similar wants and needs. By renting, they’re also lowering their monthly costs and allowing yourself the flexibility to build towards the next step, whether it’s working toward having a higher disposable income or getting into homeownership.”
Because homeownership is such a fixture in the average Canadian’s wealth accumulation journey, it may be hard for millennials to imagine letting go of that financial goal, even for a few years. But with guidance from a financial professional such as those at Meridian Wealth, Semerak said, they may be able to arrive at and accept that conclusion.
“The advice I give people is to really think about what goal they’re trying to accomplish,” he said. “If you want to own a house and it’s really what will make you happy, then maybe we can figure out ways to push ourselves and achieve that.
“But for a lot of millennials who want to enjoy a phase of their lives when they’re less held down, maybe travel and just moderate the amount of financial stress they subject themselves to, that’s probably not the best option,” he added. “If that’s what they’d get satisfaction from, then I think homeownership right now is a tough sell.”
