According to a recent Financial Post article, it’s becoming harder for Canadian buyers in several cities to upgrade from a starter home to a larger property due to economic factors.
“The value of bigger and pricier properties is rising notably faster than less expensive properties — widening the gap between starter home and dream home,” Mr. Tal writes, in an economic paper.
Real estate on the low end of the market is appreciating more slowly than higher-end properties in part because of affordability problems. First-time buyers used to be able to amortize the purchase over 40 years, which meant lower monthly payments but higher interest costs of the life of the mortgage. Nowadays, government-backed insured mortgages are limited to a 25-year amortization, pricing some first-time buyers out of the market entirely. An uninsured mortgage could still have a longer amortization period, but you’d need a down payment of at least 20 per cent to avoid mortgage insurance.
So, even those with decent-sized equity in their starter home may not be able to afford the much larger price tag of a move-up home. (Remember that a pricier property not only means a larger mortgage but also likely comes with higher property taxes, utility costs and other expenses.) While homeownership rates remain stable for those under age 35, Mr. Tal writes that homeownership for 25-35 year old Canadians has fallen from 55 per cent two years ago to 50 per cent today. Without demand for their starter homes, current owners may feel stuck. In fact, as we wrote earlier this year, some Toronto families with young kids are now squeezing into condos rather than buying the traditional detached home.
These realities have led to a spike in home renovations spending, as homeowners adapt their current property to their needs rather than upgrading to a new home. If renovating isn’t an option (for instance, if you own a condo, you probably can’t add on an extra bedroom or two), then perhaps co-owning a house with another family might make sense. We’ve previously discussed how the co-ownership trend has prompted some lenders to roll out mixer mortgages where individual owners can pay the mortgage out of separate accounts.
While higher-end real estate may be appreciating faster now, that may change in the future, as older Canadians downsize, making way for move-up buyers in the future.
