Many millennial, Gen Z Canadians need help with homeownership

Manulife Bank president and CEO discusses survey findings, strategies to address affordability challenges

Many millennial, Gen Z Canadians need help with homeownership

For years, high housing prices have made homeownership a distant and practically unreachable dream for many Canadians. And according to a new survey from Manulife Bank, which polled around 2,000 adult Canadians, the challenges of housing affordability have only deepened.

Faced with all-time highs in housing prices across the country, 75% of survey respondents who do not own a home said they want to own one, but can’t afford to. Almost as many were worried about saving up for one (71%), including four in 10 (39%) who said they worried a lot about this.

Across all respondents, Gen Z and millennials were more likely to report that they bought a new home during the pandemic. They were also more likely to admit they needed help; while one third (33%) of homeowners said they needed a leg up from their parents to get their first home, that number rose to 46% for millennial and 47% of Gen Z homeowners.

“There's nothing wrong with parents helping their adult children achieve homeownership, but I'm not sure it's the only solution for younger generations to enter the housing market,” Rick Lunny, president and CEO of Manulife Bank, told Wealth Professional. “It's not the answer for everyone, and we usually don't recommend that an adult parent go into debt to do so.”

Seven per cent of parents in the survey said they’ve provided financial assistance for their adult children who purchased a home during the pandemic. Of those who had a mortgage, as many as 5% said they tapped the equity of their own home to help their adult children enter the world of homeownership.

As Lunny pointed out, parents who help their children with the down payment on a home must sign a form from the lender certifying that it’s a gift and not a loan. Parents who wish to help their children in this way, he added, should strongly consider working with a financial planner and establish it as one of the goals within their financial plan.

“You don't have to buy a detached house as your first home,” he said. Because it’s more manageable from a mortgage payment perspective, a condominium might be good for some, though Lunny pointed out that a 600-foot space might not be enough for a household with more than one person, particularly in a work-from-home arrangement.

Another possibility opened up by the rise of remote work, he said, is to move outside the city centres. That could be a viable option for the two thirds (67%) of survey respondents who said they were worried about housing prices in their local community.

“If you're in Toronto and you bought a million-dollar home, which is an average price for a home there, you have to pay about $35,000 land transfer tax,” Lunny said. “That could be a down payment on a house somewhere else.”

Even though 71% of Canadians who don’t own a home worry about saving up for one, now might be a good time to take the leap. Canadians are taking on larger amounts of mortgage debt, though they’re doing so at record-low interest rates that allow for a very rapid paydown.

“If they take out a $400,000 mortgage at today's interest rates, in five years, they'll have paid off about $65,000 with a monthly payment of only about $1,700,” Lunny said. “That's the rent on a one-bedroom apartment in most cities.”

Recently, the Office of the Superintendent of Financial Institutions (OSFI) introduced a new mortgage stress test in an effort to help cool down Canada’s scorching-hot housing markets. From Lunny’s point of view, the new test serves as a mechanism to help ensure homeowners can afford their mortgages if interest rates were to rise – a real risk given how close to the floor they are today.

What’s crucial for homeowners, he said, is to have financial flexibility going forward. To illustrate the point, he described how the bank’s Manulife One mortgage solution, which allows borrowers to fluctuate their balances up and down as their situation permits, has proven beneficial during the pandemic.

“During the depth of the pandemic, just a small fraction of our customers needed any kind of payment deferral relief because of the built-in flexibility of the product itself,” Lunny said.

In another finding from the survey, 61% of all respondents reported that the cost of living for their households has risen over the past year, while only 7% said their cost of living has gone down. That implies that many Canadians’ wages are not rising fast enough to stave off the threat of inflation.

Even more concerning, nearly three fourths of Canadians (72%) admitted that they have no written financial plan, and just over a third of those in debt (35%) have an established strategy to pay their debts back.

“It’s very important for Canadians to have a set financial plan,” Lunny said.

Quite simply, he said Canadians without a plan should start by writing down their goals, whether it’s paying debt, creating an emergency fund, being able to financially help their children, or anything else. From there, they should prioritize, choosing which ones to concentrate on and picking one to achieve immediately as a “quick win” to motivate themselves.

To help them on their financial journey, Lunny encouraged Canadians to work with a financial planner who can provide essential guidance. They may also benefit from passive digital tools, such as the ones Manulife Bank provides to help Canadians monitor their spending habits.

“Three quarters of respondents in our survey felt that they’d never own a house,” Lunny said. “What I’d suggest is that in order to achieve their goals, it’s important to have financial conversations and tools to identify the opportunities that are open to them.”