Opening window of opportunity

Hey there, time traveller!
This article was published 09/11/2024 (671 days ago), so information in it may no longer be current.

Homeownership may still be a goal among young Canadians. Yet, many also worry it’s out of reach due to rising prices and higher borrowing costs.

A new survey by Scotiabank reveals what many already know in their gut, having witnessed the COVID-19 pandemic’s impact, driving housing demand and prices higher. Then, in its wake, spiking inflation led to higher interest rates and more costly mortgages.

The latest Scotiabank Housing Poll found 55 per cent of millennials (early 30 to early 40s) and 58 per cent of generation Z (under age 30) feel home ownership is unattainable.

Yet, 58 per cent of both age groups remain determined to own a home.

“There is some optimism among gen Z and millennials,” notes Tracy Gomes, senior vice-president of real estate secured lending at Scotiabank in Toronto.

Of course, there is pessimism, too, as the study highlights, which is understandable, especially in cities like Toronto and Vancouver.

“If you’re a first-timer trying in these markets, you probably can’t afford a 20 per cent down payment,” she says noting average prices in both cities easily exceed $1 million.

Starting Dec. 15, these buyers will have some relief. Default mortgage insurance — like Canada Mortgage and Housing Corporation (CMHC) coverage — will see the insurable limit rise to $1.5 million from $1 million.

As well, all first-time buyers will be able to seek 30-year amortization mortgages on any home purchase. Previously, 30-year mortgages — which were reintroduced this year — were to be available only for new homes. Now, the most recent rule change also allows 30-year amortization mortgages for all buyers of new homes besides any home — new or resale — for first-timers.

“Those changes will likely have more impact in the GTA (Greater Toronto Area) and GVA (Greater Vancouver Area), where prices are higher,” says Gomes.

She further notes the five-year increase is equivalent to a lower mortgage rate of 100 basis points for a monthly payment.

The increase to amortization could likely lead to more buyers in the Winnipeg market, too, where prices are considerably lower. The average price of a home at the end of the third quarter (Sept. 30) in the Manitoba capital was $362,500.

Yet, the recent trend of decreasing mortgage interest rates has already led to more activity, says specialist Aaron Brager with Castle Mortgage Group in Winnipeg.

“It’s definitely a bit more palatable for people buying now and those who have to renew their mortgages … than a year ago; that’s for sure.”

The five-year fixed rate is currently about 4.3 to 4.5 per cent and about five per cent for a variable rate mortgage. A year ago, both mortgage types were roughly 100 basis points higher.

Mortgage rates are forecast to fall even more, with the Bank of Canada expected to cut its overnight rate in the next few months.

The most recent 50-basis point cut by the central bank had the largest effect on variable rate mortgages, which move accordingly with the BoC benchmark. In contrast, bond yields determine fixed rate mortgages.

Typically, yields move ahead of central bank decisions, trying to forecast their direction months in advance. As a result, fixed rates have been moving lower for several months now, anticipating the BoC cuts.

“In the near-term, it’s likely we could see a switch where the variable rate is a better performer,” Brager says. “If you’re betting on trying to save on interest costs, a variable rate may be the way to go.”

That said, many clients are opting for three-year, fixed rate mortgages, believing rates will be lower in three years.

Others are choosing five-year fixed mortgages because they just “want to set-it-and-forget-it,” he says.

Further large rate cuts — perhaps 50 basis points — could indeed make a measurable difference regarding affordability.

Brager says a 0.5 percentage decrease is worth about $30 less in monthly payments for every $100,000 of mortgage.

Of course, the challenge of waiting longer is lower rates will likely push prices higher with more buyers back in the market.

It’s little wonder many young Canadians are feeling stressed about housing even amid lower borrowing costs. They’ve been worried for some time, says a millennial-aged personal finance expert in Ontario.

“For the past several decades, it’s just gotten increasingly more expensive to buy a home, making it become even further out of reach of the average Canadian,” says Jessica Moorhouse, host of the More Money Podcast and an accredited financial counsellor.

“It’s not surprising that young adults are living with their parents longer and putting off travelling, so they can focus on saving for a home.”

Higher prices and borrowing costs have many would-be first-time buyers struggling to find affordable homes, Gomes admits.

“The challenges today are coming up with the down payment because home prices have gone up and the second is the interest rate to qualify for the mortgage payments.”

The latter may be less challenging today, but the former barrier to entry remains. That’s why individuals dreaming of buying should plan as soon as they can because they need time to properly leverage tools like the Home Buyers’ Plan and the relatively new First Home Savings Account.

Using these tools effectively requires a commitment to saving and know-how, she says. “And one area where gen Zs and millennials could improve is their knowledge of what it takes to buy a home.”

Gomes further points to only about a quarter of these respondents stating they are confident on the topic.

All of which shows that aspiring homeowners should seek advice — and sooner than later.

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com