HOW WILL FIRST-TIMER BUYERS AFFORD A HOME?

A recent poll by Vancouver-based credit union Vancity asked potential first-time home buyers how they would get the cash for their down payment. Some said they would take on a part-time job, some thought they would try buying lottery tickets; some suggested they would get married; and others said they would wait for an inheritance.

The poll was released to promote Vancity's new mortgage product, which provides pre-approved buyers with up to 50 per cent of their down payment. But it brought up some interesting questions of how first-time buyers in Canada's priciest real estate markets could hope to get into the real estate market.

A report by BMO early this year says the cost of buying a home in Canada rose from about three times the disposable income of the average household in the 1990s to 4 1/2 times household income by 2011. It says average house prices have doubled and in some places tripled during this time.

"The increase in the cost of living, compared to what baby boomers experienced, will be one of the key factors that dramatically challenge the ability of generations X and Y to achieve their goals, unless they make the changes necessary to deal with this new reality," says the report. "The end result is that it is very likely that generation X and generation Y will have to save more efficiently and work more years than the baby boomers did."

But recently Sal Guatieri, senior economist for BMO Capital Markets, said in a report that the millennials (those born between 1981 and 2001) are better off financially than their baby-boom parents were 30 years ago.

"There is a popular notion that millennials will become the first generation to do worse than their parents economically," says Guatieri. "However, apart from taking on bigger loans to buy pricier homes, young Canadians today enjoy better job prospects, earn more and are wealthier than in the 1980s."

Millennials who are looking for a job have a 93 per cent chance of finding one, compared to 90 per cent for people of the same age in the mid-1980s. Because of their higher education, the millennials have slightly higher income (adjusted for inflation) than their parents did, and the median net worth of households headed by someone 25 to 34 years is more than it was for their parents' generation.

On the down side, today's young people "are likely saddled with more student debt, considering that tuition costs have risen three times faster than consumer prices since 1984," says Guatieri. Today, young families have more debt in general than did their parents in the 1980s.

The report also says that the average house price was 10.4 times the median income of young families in 2011, more than double the ratio of 30 years ago, relative to income.

"Many millennials are priced out of the Vancouver and Toronto detached housing markets, or will need to take on large debts to get into them," says the report.
Many of them are likely to get help from their baby-boom parents. A 2012 BMO report estimated that during the next 20 years, baby boomers will inherit $1 trillion -- or an average of $56,000 per boomer.

"For those baby boomers who have already seen their home values appreciate, an inheritance is an opportunity to assist their millennial generation children with down payments to enter the real estate market, particularly in major urban centers such as Vancouver," says a recent report by Sotheby's International Realty. "For other baby boomers, an inheritance triggers the decision to change homes or downsize."

Vancouver real estate marketer Bob Rennie recently told an Urban Development Institute gathering that baby boomers hold $163.4 billion worth of mortgage-free property in the area. He said that almost one-third of homes in Metro Vancouver have more bedrooms than people, because so many empty-nesters live there.

Despite the challenges that first-time buyers face, most young people still want to get into the real estate market. The BMO report says the baby boomers, generation X (born between 1965 and 1979) and generation Y (born between 1980 and 2000) all have one thing in common: buying a home is one of their top priorities, along with saving for retirement and saving for their children's education.

A recent survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP) says that 55 per cent of homes purchased in 2013 were bought by first-timers. The survey says Canadians still believe that real estate is a good long-term investment and that mortgages are a form of "good debt."

Most Canadians surveyed by CAAMP say they have no regrets about taking on the size of mortgage they did.

"From the consumer perspective we have a picture of a very confident, healthy mortgage market," says Jim Murphy, president and CEO of CAAMP. "Key to the current stability in the mortgage market is the fact that Canadians continue to pay down their mortgage debt faster than they are required and they continue to take out five-year, fixed-rate mortgages."