Younger Canadians getting stuck in "starter homes"

The increasingly bifurcated nature of the Canadian housing market sees Canadians giving up on the dream of moving up.

Younger Canadians getting stuck in "starter homes"
A new CIBC survey finds young Canadian homeowners are finding it harder to move out of their first home because of increasing home prices.

On average Canadian house prices climbed five per cent in 2014. The price inflation has increased the price of homes in the mid- and high-price market, far more than that of lower-priced ones. This is making it increasingly difficult for younger Canadians to move up out of their starter homes.

"The value of bigger and pricier properties is rising notably faster than less expensive properties. [This is] widening the gap between starter home and dream house," said Benjamin Tal, deputy chief economist at CIBC. "Regardless of what your starting point is...the desired move up target is getting further and further out of reach."

The historical pattern of Canadian personal financial development is a well-known narrative. "You graduate from school, land your first job, get married, buy your first house, start a family, and after a number of years, move up to a larger house to accommodate your growing family," says Tal. “But this is not the case today…There are many indications that this cycle that dominated the Canadian housing market for decades, is breaking.”

In Toronto the price of homes in the $300,000 to $500,000 range rose 28 per cent between the first quarter of 2010 and the first quarter of 2014. Comparatively, the price of homes between $800,000 and $1.2 million jumped over 40 per cent. Homes priced between $1.2 million and $1.6 million shot up better than 50 per cent in the same period. That is, there is a high-end market that is doing well. Those more down-market homes are not rising as fast. In Vancouver, the gulf is even wider. Homes that sold for $500,000 to $800,000 have increased by only a few percentage points whereas homes prices at $1.1 million and higher have jumped by close to 18 per cent. The gap between these homes has grown by close to $200,000 in the last four years.

The most interesting bit in the study is that there seems to be a cooling occurring in the less-pricey areas of the home market. Mr. Tal notes that while the volume of house resale activity in Canada looks stable--unit sales have been between 35,000 and 40,000 units per month since 2010--the underlying story "is anything but." According to Tal, "the apparent stability masks a more complex story...Sales of units at the low-to-mid price range fell notably since 2010. Sales rose modestly for the mid-to-high price range, and advanced rapidly for units in the upper end of the market.” Tal suggests the drop in sales at the bottom of the market is the result of recently tightened mortgage regulations that are working to freeze some first-time homebuyers out of the market. The homeownership rate among Canadians aged 25-35 (first-time homebuyers) has fallen from 55 per cent in 2012 to 50 per cent.

What does this mean for the social and financial development of younger families? Who knows? But according to Tal, Home Depot should do well. He notes that, "with limited move up options, it's no surprise then that many Canadians choose to renovate their existing homes," says Mr. Tal. "Over the past five years, spending on home renovations as a share of total residential investment averaged close to 46 per cent--by far the largest share on record. Renovation activity will remain robust and, in fact, might accelerate in the coming years."
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