A housing bubble is a huge party.
Everyone gets drunk and has a good time. The economy booms because housing, particularly construction, is a very local business. It creates local jobs. People spend this money. Businesses get this money. Governments exact their pound of flesh.
But there is a drawback to a housing bubble, beyond the fact that it will eventually crash with terrible consequences: New entrants into the market are getting locked out by soaring prices.
Canada’s housing bubble has been a sight to behold. Home prices only dipped 8% when the US housing market crashed. Then it re-soared. Now, across the country, home prices are 26% higher than they were at the already crazy peak in 2008. In Toronto, they’re 42% higher! Prices in the major urban centers where young people like to live have become a challenge for first-time buyers.
First-time buyers are special. One, they’re the foundation of a healthy housing market; they represent growth. And two, they don’t benefit from any run-up in home prices. Current homeowners profit from the housing bubble by owning a home that has gotten pricier. When they move, they sell an overpriced home, which soothes the pain of buying another overpriced home. But first-time buyers feel the full brunt of the bubble price.
So the Bank of Montreal (BMO), in its Home Buying Report, determined just how difficult it’s getting in Canada. The survey found that 42% of the potential first-time buyers, those hardy folks that haven’t been discouraged by the soaring prices, expect to recruit the help of mom and dad, and in a big way.
To begin with, which is not a good sign, first-time buyers whittled down their budget by C$3,400 on average from last year to C$312,700 (US$259,000).
By comparison, the median home price in the US, according to the NAR, was $212,000 in March. First-time buyers in the US are struggling too, and many have thrown in the towel. They accounted for 30% of all homebuyers in March, down from 40% during normal times. But first-time buyers tend to buy below the median price. So their Canadian counterparts have to jump over much higher hurdles.
They plan to put down almost C$60,000, according to the BMO survey. But since they don’t have this kind of money, they expect to ask their parents for C$37,500 on average.
Even current homeowners who want to move to another home – the second-time buyers – are having a tough time dealing with their dreams, which have grown beyond their reach despite my elaborate theory above. And so 42% of them, same proportion as first-time buyers, are expecting financial help from their folks.
But they’ve got a much bigger nut to crack: they expect to spend on average C$473,900 (US$391,000) and make a down payment of C$123,000. But they don’t have it. So they expect their parents to contribute about C$95,000!
“Whether buying a first home or moving onto another home, we’re seeing more and more buyers embark on the journey with help from family,” is how the report explained this phenomenon.
And to deal with this crazy housing market, first-time buyers get increasingly intrepid: the number of those willing to enter into bidding wars jumped to 48%, a big increase from last year, when only 35% were willing to do so. Second-time buyers are more reticent. Only 36% said they’d enter into a bidding war.
But running over competitors and chasing prices higher has an impact: “The increase in competition from a growing number of Millennial buyers is helping to push up prices….”
We knew it. It’s their fault.
In the US, a Redfin survey reported that 49% of its agents found that the single greatest challenge for first-time buyers wasn’t getting a mortgage or anything like that, but finding a home on the market that they could “actually afford.” Another 27% cited competition from other buyers [read… Here’s What’s Killing the American Dream].
“The lack of affordability has changed the market quite a bit,” commented WOLF STREET contributor Melissa Terzis, a realtor in Washington, D.C. “What we are seeing in DC is that most first-time buyers are now coming to the table with financial assistance from their parents.”
No word on second-time buyers yet. But the way prices have been rising….
Canada’s housing bubble is truly magnificent. Since 2000, home prices have jumped 140%. A number of years book double-digit gains, fired up by easy money, a resource boom that has now crashed, and in certain metropolitan markets an influx of wealthy, motivated foreign buyers. So home prices in Vancouver and Toronto are expected to continue rising “over the next few months.” But in other cities, the party has already ended. Read… Magnificent Housing Bubble Unravels in Much of Canada
