·August 20, 2014

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.