The Importance of First-Time Buyers

First-time-Home-Buyers-Mortgage If you’ve ever wondered how vital first-time buyers are to the real estate market, here’s the answer.

The Altus Group‘s “FIRM Residential Mortgage Survey” shows first-time home buyers accounted for about half of all homes sold in Canada in the last two years. That’s more than a quarter million sales each year.

“First-time buyers make the home-sales world go around,” states the report. They play “an important role as buyers in the newly built market and also in purchasing existing homes…”

First-timers are especially vital to lower-end property sales. That’s essential to a healthy market because it allows existing homeowners to sell efficiently and then upgrade.

Despite low interest rates, however, Altus Group says access to the market has become more restricted for entry-level buyers. It attributes that to prevailing house-price levels and the “cumulative impacts of more stringent mortgage insurance criteria.”

Canadian Real Estate Association economist, Gregory Klump, suggests the new mortgage rules have had an immediate impact. “Changes to mortgage regulations that took effect in April 2011 likely sidelined a number of first-time homebuyers,” said Klump.

Looking into the future, renters who haven’t bought yet are also less optimistic. Altus Group says first-time buyer intentions among this group are down from a year ago, and below the 2002 to 2009 average. According to the report, this too is due to tighter mortgage insurance rules.

Of all the government’s recent changes, the reduction in maximum amortization carries the biggest impact. 41% of home buyers in the last 16 months have chosen extended amortizations (> 25 years), according to CAAMP. If you included just first-time buyers, that percentage would be significantly higher—especially in pricey markets like Vancouver or Toronto.

As a rough ballpark, dropping from 35 to 30-year amortizations cuts the average buyer’s maximum purchase price by 6-7%. Put another way, the 5-year reduction in amortization takes the typical first timer over 6% more income to buy the same priced house. (That’s not a commentary for or against longer ams., just a point of observation.)

Shorter amortizations are bound to push some buyers into cheaper properties (until prices adjust) or defer people’s home buying to some degree.  TD recently found that 63% of younger buyers polled cite the loss of 35-year amortizations as having “a significant impact” on their decision to buy a condo over another home type.

Here are a few other notable findings from Altus Group’s report:

  • Those aged 25 to 34 accounted for six of every 10 first-time home buyers.
  • About one in four first-timers were between 35- and 49-years-old.
  • Single-person households made up roughly one quarter of recent home purchases.
  • The average price paid by recent first-time buyers was $273,000, or about four times the average annual household income of $69,000. That’s up from the price-income ratio of 2.7 for first-time buyers, as per the 2001-02 report.

The Altus Group is an economic consulting firm. It releases the FIRM Residential Mortgage Survey quarterly in conjunction with Ipsos Reid.

Steve Huebl and Rob McLister, CMT

  1. Hello, Just wondering, wouldn’t all these first time buyers make the real estate market very sensitive to higher interest rates? First time buyers usually have a lot of debt right?

  2. How does this data compare to historical data? Seeing so many young buyers in the market leveraged up 4 times makes me, as an investor, a little uneasy. I don’t believe it would be a bad thing if we retunred to 20/25 (ie., 20% down and 25 yr amortizations).

  3. In addition to the crowd who are “priced out” by the move to 30-year amortizations, there is a subset of potential first-time buyers — usually professionals — who are sitting on huge down-payments but are waiting until the market calms down before jumping in.

  4. For most people, 35 yr. ams were a preference, not a necessity.
    To wit: In a 2010 CAAMP report based on 85,000 insured mortgages, the data showed that only 2% of the borrowers in the survey who chose a 35 yr. am would not have qualified for a 30 (Rob, you quoted this stat yourself in a previous post).
    I agree that markets are made at the margin, and on the importance of first-time home buyers to the health of the market. But I think the assertion that dropping the maximum am by 5 yrs is pricing new home buyers out of the market based on Mr. Klump’s observation that the latest changes “likely sidelined a number of first-time homebuyers” and a qualitative poll that says buyers felt a “signficant impact” on their buying decision, should be not been taken with some salt given the strength of real data suggesting otherwise.
    My two cents.

  5. Hi Dave,
    Thanks for posting. You’re absolutely right about 35-year amortizations not technically be required for most people to qualify.
    That said, here are some other things to consider:
    * The survey you reference (assuming we’re talking about the same one) was not limited to first-time borrowers. Utilization of extended amortizations is much greater among first-timers.
    * That survey also included refinances. This discussion is limited only to purchases.
    * While many can technically meet guidelines of approval with a 25-year amortization, they won’t necessarily be approved. Keep in mind that report you reference did not evaluate each client’s application. It made assumptions based only on a handful of metrics and virtually none of the qualitative data that is used in the underwriting process.
    * The stats clearly show that most new buyers prefer extended amortizations. Many would not buy without them (or would buy at a lower price point), even though they can qualify at a shorter amortization. A lot of people simply need more “breathing room” from a budget standpoint before they’ll take on the obligation of home ownership. Extended amortizations allow for that.
    The heart of the matter is that a reduction in amortizations will impact the buying plans of a subset of first-time buyers. Since entry-level buyers are so important to our market, this is a point that can’t be dismissed. To some degree, the new mortgage rules will indeed affect home demand and prices, at least in the interim.

  6. There doesn’t seem to be the so-called affect of less home sales in Toronto that the experts called for AFTER the cut-off for no more 35 year amortizations. May sales in the big smoke look to top last year’s May sales by 4-5%. BoC better make some interest rate moves soon or it will be too late to stop the craziness

  7. PRavi – you’re predicting almost 10,000 sales in May?
    (May 2010 saw 9470, so 5% over that is 9944)

  8. Thanks for the comments everyone…
    Mark H: People are unquestionably more leveraged today. So yes, the real estate market (and economy in general) is more sensitive to rate increases. That’s why many believe the BoC won’t have to raise that much in this rate cycle.
    VinceT: First-timers have long been 40-60% of the market depending on the year. (Src: CMHC) Keep an eye on affordability and employment/incomes as those are among the key metrics that govern the health of the real estate market. Other things being equal, bigger down payments and shorter amortizations do theoretically reduce default risk to some degree. The thing is, not everything is equal. Stricter financing rules also remove choice from very well qualified borrowers who may simply prefer to allocate their cash differently. It’s important to remember that mortgage underwriting is not a two-or three-factor model. In other words, down payment size and amortization length are just two facets. They are routinely and easily outweighed more important factors like debt ratios, repayment history, job stability, etc. The risk people perceive in the market today isn’t exacerbated by strong borrowers who simply choose to put down less or extend their amortizations. It’s the people without the ability or willingness to pay that we have to worry about.
    Joe Q: Those people certainly exist. Would love to see stats on how many of them are out there. I’m guessing a relatively small number.
    PRavi: Seasonally adjusted home sales fell 4.4% nationally in April. There may be some rebound in May because of that. We’ll need to watch what happens after the spring market. You’re right that low rates are still going to fuel some fire.

  9. Actually, sales dropped from May 2009 to May 2010 by a few %, and also dropped from the first half of May 2010 to the first half of May 2011 by a few %.
    The real story in Toronto is the record-low inventory.

  10. I highly doubt the stats are even collected, but I know a surprising number of people in Toronto with relatively high family incomes that still rent.

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