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Robert McLister: When someone making six figures can't save fast enough, you know there's a problem
Published on May 10, 2024 • Last updated 1 hour ago • 4 minutes reading time
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When you look at the numbers, it seems almost impossible for young people today to save for a home. Photo from Getty Images
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If you're a first-time buyer, saving carefully for a new home means you'll likely end up paying a lot more for that home.
It's like the most depressing game of Monopoly in the world: you give “go,” collect your $200, and real estate prices rise fourfold.
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New data from Canada Mortgage and Housing Corp. (CMHC) suggest that saving for a down payment takes an average of 4.2 years. That doesn't sound so bad when you consider that there are always headlines about down payments taking decades to accumulate.
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The problem is that relying on averages can be misleading.
In high-demand regions like Toronto and Vancouver, it takes well over a decade for individuals to accumulate a minimum down payment for an average home, even if they earn $100,000 a year and save 10 percent of their gross income tax-free at a conservative rate of return.
And who can afford to save 10 percent of their income amid sky-high rents, shrinking inflation, unexpected expenses and the hard work of the taxman?
But for the sake of conversation, let's play along with the 4.2-year down payment fairy tale. What happens to prices over 4.2 year periods?
Based on 1981 data from the Canadian Real Estate Association (CREA), the average 12-month appreciation of a home in Canada is 5.75 percent.
So if we take CREA's average Canadian home price of $698,530 and increase it by 5.75 percent per year, that's a price increase of $185,000 in just 4.2 years.
There's no way the average Canadian can save enough to make up for this, let alone a first-time buyer who wants an “average” home. To save that much so quickly, you'd need a couple each raking in well over $100,000 a year.
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However, a person making $100,000 a year and squandering 10 percent of their income at a 3 percent rate of return could reach at least the minimum down payment in less than five years. This gives them a foot in the door, regardless of all the additional principal and interest they would have to pay over the course of their lives.
Okay, that's all well and good, but when you enter our biggest urban jungle, the situation goes from difficult to “You've got to be kidding me.”
Imagine you're a single buyer making $100,000 and eyeing an average Toronto condo that costs $766,917, according to the Toronto Regional Real Estate Board. Unless you're one of the 30 percent of buyers who get a family gift for your down payment and have no other options or help, saving up would take over seven years Today's Minimum down payment for this condo based on historical appreciation rates.
“Today” is the key word.
The problem is that after just five years of diligent saving, the formerly $766,917 condo would skyrocket well over the state's default insurance cap of $999,999.99. At this point, you would have to deposit 20 percent instead of 7.5 percent or less.
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But there's no way to save a 20 percent down payment on a $100,000 salary and still earn a three percent return, even if you use a tax-advantaged savings account. You would have to put more money aside or take significantly more risk with your investments.
I won't bore you with more hypotheticals, but suffice it to say that a fee-based financial advisor can help you create scenarios, confirm your required target return, and plan how long it will take to save the down payment, that they need.
As a side note, for 12 years the government has refused to link its $999,999 property default insurance limit to rising property prices. This makes any commitment to access to mortgages in major cities ridiculous. The Liberals have already promised this change in 2021, but such an increase would further drive up prices, other things being equal, and they didn't like that compromise.
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It's hard to swallow that someone in this country who makes six figures and saves a tenth of their income finds it so difficult to save even for a condo in a drawer in our major metropolitan areas.
Federal and provincial governments say they have their best people on the problem, but they're getting to the point so late that affordability is virtually in tatters.
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If I were a sprightly first-time buyer observing Canada's home-buying chaos, I'd come to a quick verdict: Find a way to extort an immediate down payment in case prices go up again.
That doesn't mean prices will continue to rise at historic rates. This may not be the case due to changes in immigration, affordability restrictions, a weaker economy and new aggressive housing policies. But in the long run, as always, they will beat inflation, and that will be enough to push the minimum down payment targets further.
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In addition to playing the lottery, there are other ways to put together deposits:
- Asking parents or grandchildren for a “gift” or early inheritance
- Settle for an entry-level home of $500,000 or less with a minimum down payment of just five percent
- Shared home ownership with someone who has more down payment funds than you
- Use of shared equity providers such as Ourboro, Lotly and Arch
- A borrowed down payment (which is a bad idea unless they can comfortably service all of their debts and expect a significant increase in income).
This is the predicament that our leaders, whose immigration and housing policies largely control the supply and demand for housing, have put our young people in. This could well contribute to the fall of this government in 17 months. But if you're looking to buy a home, don't let this drama stop you from making a down payment as soon as possible.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X below @RobMcLister.
Click here to see the lowest nationwide mortgage rates in Canada today
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