First-time Buyers Are Paying Up

Each year about 300,000 Canadians buy their very first home — at least, that’s how many did in the years 2009-2013 (source: Altus Group via The Globe and Mail).

Typical first-timers have been purchasing homes that are roughly 11.6% cheaper than the national average. That implies up to a $355,000 price tag for today’s typical first-time purchase, much higher than previous reports have estimated.

At that price, 10% down and a 2.89% five-year fixed mortgage will get you a $1,530 monthly payment. That’s a sizeable obligation for the one-half of first-timers who lie in the 25- to 34-year-old age bracket (Altus’s data).

Folks in this age range make about $47,900 a year if you extrapolate StatsCan data. Crunch the numbers and it reveals that the average 25- to 34-year-old faces a 48% total debt service (TDS) ratio if he/she wants to buy the “typical” starter home on their own. That assumes no condo fees or other debt — which is unlikely.

This presents a challenge to solo buyers, of course, given the maximum TDS (on exception) is 44% — and lenders and insurers are granting fewer exceptions to 44% than they used to.

It’s no wonder then that only 1 in 5 first-time buyers are single-person households. Most young people need another applicant’s income to get approved for their desired starter home. Either that, or they need a bigger down payment.

Somewhat surprisingly, many newbies buying $350,000+ homes are putting down a respectable amount. In fact, roughly half of them in this price range put down at least 20%.

By contrast, about half of those buying homes under $200,000 are putting down the minimum ante: 5%.

All of this helps explain why most people who rent do so reluctantly. Almost 80% of Canada’s 2.4 million renters under 50 say they’d rather buy. But the majority can’t, mostly for financial reasons…imagine that.

Sidebar: The median first-time buyer is 34 years old. (source: Altus Group)

Rob McLister, CMT

  1. My wife and I earn the $47K figure each, spot on. We are financially conservative and have no children (none planned).

    We found a $90,000 manufactured home on leased First Nation land in BC. We approached the bank for financing and the first question asked was “Why don’t you have more than 1 credit card each?”. The second question was “Why don’t you buy a $350,000 home? You qualify.”

    The answer is easy: we cannot REASONABLY afford a $350,000 home. If one, or both of us were to become unemployed then we would not be able to meet our monthly debt obligations. Who in their right mind has a dream of home ownership that includes the nightmare of demand/foreclosure?

    We proceeded with the purchase of the manufactured home. We got a 10 year amortization, 8 years remain. If one of us loses our job, we can still get by and keep the house. If BOTH of us lose our jobs then we could reasonably make the $700/month loan payment with full-time minimum wage employment.

    Our home overlooks beautiful ocean and mountain scenery. It takes 6 minutes to get our boat from our home to the boat ramp and into the water. Our neighbours are mostly elderly, quiet and polite.

    Risks? We’re on leased First Nation land. The First Nation can evict us at any time. The manufactured home park has been established for 40+ years and the Locatee (the person who holds ‘title’ to the land we’re on) assures us that she and her family will continue to maintain the park for decades to come ($10,000+ cash income per month from the leasees is difficult to turn down).

    $355,000 is insane to my wife and I but I’ll continue hooking up loans for people who want to risk the nightmare of foreclosure.

  2. Young people need to buy what they can comfortably afford, and not a penny more. Have 6 months of living expenses in the bank and keep your TDS at 40% or less. Don’t live for your lender.

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