Toronto’s real estate market has been characterized by its intense competition, lack of supply and soaring prices. The pandemic has further exacerbated the market, pushing more and more buyers out. Millennials and younger Canadians, seniors and those on fixed incomes, and young families without the luxury of generational wealth are feeling the brunt of such a market.
Across Canada, the national average house price in March 2021 was 32% higher than March 2020. Even smaller towns and cities such as Bancroft, ON have seen an increase in price for their homes. This is great for owners and sellers but the buyers in the market must pay the price. Additionally, with the rapid growth of prices far outpacing the growth of income, prospective and young buyers are under huge stress.
This massive boost in equity is great for many homeowners but those without the privilege of owning a home are finding themselves being left further behind. Those who can afford to buy are rapidly buying in a rush to take advantage before prices go higher, driving the price up further. These decisions to buy may not always be in their best interest either. Such a large transaction has more than just a financial burden and rushing into such an arrangement can have dire consequences for the unprepared.
Covid-19 pushed the market ever further into an overheated buying frenzy. As prices continued to rise, buyers flocked to the market. Sales of existing homes rose 76.2% in March 2021 over March the previous year, pushed by the added lower interest rates that stimulated the economy through the pandemic and ongoing lockdowns. Bidding wars, multiple offers, bully offers high over the list price and houses selling in mere days became the norm.
But this kind of market isn’t good. It may seem great, particularly for a seller but the negative consequences are a burden on everyone. Home ownership has long been seen as a financial milestone for many Canadians to build their wealth. In previous decades, many working families have been able to secure their futures by following this route. However, with intense rising competition and prices, this is becoming an impossible task for many buyers, particularly younger generations such as Millennials and Generation Z.
With the average detached home price in Toronto exceeding $1 million in March, the new minimum down-payment became a huge burden for many buyers. $200,000 is a huge milestone to save up for and without income growth paling in comparison to home prices, many potential buyers under 40 who have not yet bought a home are disheartened. A RBC poll found that 36% had given up on the idea of buying a home. Even if they still had hope, it could take almost 21 years to save consistently for such a down payment. Even smaller cities are suffering such issues. Halifax has recently seen a $121,278 price jump on the previous year for its average resale prices. Buyers who have been leaving the big cities are using their tactics to secure places in smaller communities, heavily influencing the jump in price.
Potential buyers are relying more and more on parents and family in assisting them in affording the down payment of a house. While this concept is nothing new, an MPC report found that 33% of first-time home buyers in 2020 received financial assistance from family members. It is estimated that the average assistance ranged between $25,000 and $100,000. This also highlights the rising inequality as many lower socioeconomic families are struggling to enter the real estate market as a means to build their wealth.
The practice of blind bidding is also becoming a huge problem. Due to the intense competition, buyers have to make a very quick decision on whether to commit. Many times, they will throw in a huge bid over the asking price just for the chance to secure the home. Bidding wars can ensue which puts even more strain and pressure on many buyers as they fight amongst each other without any idea what kind of prices are being considered. The list price is merely a number.
But this can also be a huge problem should a buyer’s blind bid be successful. A huge stress and financial burden can be incurred from such practices. With interests as low as they are, the jump in price may not seem like a big deal but if interest rates increase, the financial burden could become crippling for many buyers who rushed into the market. The debt burden incurred by many buyers today has some worrying consequences and implications for the future.
With a huge portion of a household budget going towards a mortgage debt severely shrinks a household’s available funds. A pay increase may help but the income growth in previous years doesn’t paint a positive and hopeful picture for the future. A household with less disposable income means less spending which inevitably leads to a slower economy. This is incredibly disastrous especially with the current pandemic putting such a burden on the economy. Our economic recovery depends on households spending money on goods and services. Additionally with the prediction of higher interest rates, future payments are expected to be even more burdensome on the buyers.
Despite many benefits rising home prices do bring, the overwhelming negative consequences are something that needs action now to remedy before it becomes a catastrophe. Regulators and government bodies need to step up and address the root cause of the issues rather than band-aid solutions that have been the norm recently. Without such action, the real estate market will continue to spiral out of control, inequality will continue to grow and such things will lead to an inevitable collapse.