Why first-time homebuyers—especially millennials—are struggling

Preparing to buy a home is an exciting experience, but also a stressful one. In Canada, home prices and sales activity dipped in March, on average—by 10.4% and 22.7%, respectively—but prices remain sky-high in many regions and Canadians are still struggling with debt.

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At the very least, people are unsure how to save for a home, according to a new TD survey that polled, in February, 1,001 adults who were identified as first-time homebuyers. It revealed many of those surveyed aren’t taking the steps needed to prepare when purchasing a home, given just 39% are reducing their debt and less than one-third (28%) are working to improve their credit scores.

Further, seven out of ten respondents (71%) said they worry about being hit with unanticipated costs during the homebuying process.

While many homebuyers save for down payments, that’s just one item to prioritize, says Marc Kulak, vice-president of TD Bank Group, in a release. “For example, when you prepare to have kids, there are numerous steps and stages you go through to help prepare for their arrival. But when it comes to buying your first home, first-time buyers often enter the process with lots of unanswered questions.”

Indeed, lack of knowledge about the home-buying process was a concern for those polled. More than half (56%) are anxious about forgetting to take a crucial step, and nearly one-quarter (24%) said the process was stressing them out. One-fifth (21%) admitted they were overwhelmed.

Millennials’ worries and budgets

While Canadians aged 18-37 who rent or live with family dream of owning a home, few are on track to make it a reality, says a CIBC survey that polled 1,471 randomly selected Canadian adults in that age range in March.

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Nearly half (46%) of those who intend to buy plan to do so within the next five years, but 76% haven’t started to save or have only accumulated less than one-quarter of their down payments, the survey finds.

Grant Rasmussen, senior vice-president of mobile advice at CIBC, says in a release that higher house prices, the prospect of higher rates, and new qualifying rules for mortgages are the main barriers for millennials, causing them to “pause and question whether being a homeowner is realistic or even desirable for them.”

So, while 46% of respondents felt renting is a waste of money and 49% want to own to a home to start a family, many millennials aren’t taking the leap.

What’s important, the survey stresses, is that young, aspiring homeowners understand the costs they’ll face when they do. Even if they feel renting is a waste, they need to know that their home-owning peers spend as much as 50% more per month on housing costs than renters do, and more than half (51%) admit they didn’t realize what the total costs would be.

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The good news is millennial homeowners still manage to save more each month than renters or live-at-homers, on average, the CIBC survey says: the former group saves $566, compared to $368 or $360, respectively.

Further, young homeowners that were polled said they’d amassed an average nest-egg of just over $60,600—more than double that of their peers who rent or live at home.

This is a surprise, says CIBC, since those who rent have fewer housing expenses. Yet, only 18% of renters and live-at-homers who intended to buy a home had met with a financial expert, and less than half (45%) had set a monthly budget.

Read: Canadians reveal highest home purchase intent in 8 years: poll

What are millennials paying for homes?

There are significant disparities in the types of properties young homebuyers can afford in the country’s largest cities, says Royal LePage in a Thursday release.

With an average salary of $38,148 in 2016, according to Statistics Canada data, millennials typically have a maximum home-buying budget of $203,246. This amount factors in a 20% down payment and the impact of OSFI’s new stress test, which has reduced the average peak millennial’s purchasing power by approximately 16.5% or $40,103. (The term peak millennial was coined by U.S. economist Dowell Myers and describes the cohort born between 1987 and 1998.)

The challenge is that amount is far below the aggregate Canadian home value of $605,512, a figure from Royal LePage’s National Home Price Composite from Q1 2018. As a result, millennials are either biding their time or looking for creative solutions to finance a home purchase, the Royal LePage release says.

“In our largest cities, it is difficult for young people to purchase a home on a single household income,” says Phil Soper, president and CEO at Royal LePage, in the release. “Some will purchase homes with family or friends, and some are following the age-old practice of saving money and waiting until they can effectively double their maximum budget with a life partner.”

With a partner, peak millennials have “a combined average maximum budget of $406,479, exclusive of any help from the bank of mom and dad,” the release says. For that amount, on average in Q1 2018, couples could find homes with 2.7 bedrooms, 1.8 bathrooms and nearly 1,300 square feet of living space.

Of course, that varied by region, with Vancouver and Toronto offering smaller spaces for that price—typically, entry-level condos. Halifax “delivered the biggest bang for a peak millennial’s buck, offering them an average of 3.1 bedrooms and [three] bathrooms,” the release says.

Greater Vancouver was Canada’s most expensive market, where high prices have pushed many peak millennials into suburbs such as Coquitlam, Langley and Surrey.

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