The right play for first-time home buyers
Renting is the obvious alternative for someone who is unready for the financial blood-sucking that home ownership entails.
But low vacancy rates have made it a landlord's market in some cities, notably in Toronto. Might as well buy as pay hefty rents, some will say.
Don't listen, Gen Y. Tough it out in the rental market unless you can truly afford a home or, if extreme measures are required, move back in with your parents for a while to save a down payment.
The best news on real estate for young adults is that home sales are declining in many cities with prices either following along or at least not rising by stupid amounts on a month by month basis. As I said in a column a few weeks ago (tgam.ca/DgoV), the right play for people ready to buy a first home is to sit tight and let the market deflate.
Those who don't have the means to buy a first home are in a tough spot because of our society's preoccupation with home ownership (a topic well covered in this CBC News article I linked to in my blog recently: tgam.ca/DiDF). Young adults are the segment of the population worst served by this attitude. They can't afford to buy a house, so they feel inadequate or cheated. Or, they stretch too far to buy a house and get bled dry by the cost.
Renting by no means has to be a permanent choice. The key to making it productive is to start an aggressive savings plan while you rent. Estimate the cost of owning a home (mortgage plus property taxes, utilities and insurance - more to come on this in a future column), subtract the cost of your rent and then put as much of the rest as possible in a high-interest savings account.
Renting isn't a quick and easy alternative to buying, though. Canada Mortgage and Housing Corp.'s latest report on the rental market says the national average vacancy rate for apartments was 2.3 per cent in April, which compares to 2.5 per cent a year earlier and a long-term average of 3.2 per cent. Regina, Winnipeg and Montreal are among the cities with smaller vacancy rates than the national average, but Toronto stands out on the low side at 1.5 per cent in April. The city's vacancy rate for condos is even lower at 1 per cent.
Such low vacancy rates in the city aren't unprecedented - in 2001 the rate hit 0.9 per cent, CMHC numbers show. But in Toronto's rental market these days the level of hysteria is rising, just as it did long ago for buyers. Recently, there have been reports of bidding wars for rental properties.
CMHC measures rental costs in terms of two-bedroom apartments. Toronto's average was $1,164 per month last spring, second to Vancouver's $1,210. You could carry a $250,000 mortgage at today's five-year rates for those rents, not that there's much of anything in this price zone in either city.
On Kijiji, Toronto rental costs look more discouraging. A two-bedroom downtown condo was recently offered at $2,750 per month; an off-the-downtown one-bedroom apartment in a house was offered at $1,400; in suburban Mississauga, a two-bedroom condo was listed at $1,850 per month. Actually, a good number of the ads were from people looking for a place, not offering one for rent.
As tough as the rental market may be, it's still a better option for Gen Y than buying prematurely. Renting, at least, is a finite expense each month. Housing is infinite - there are fixed costs, plus endless discretionary expenses. Buying is not the solution to difficulties in finding a place to rent, at least not without further price declines. Instead, find a roommate and pool your resources to cut rental costs.
Or, talk to your parents about moving back home. My newest book is titled How Not to Move Back in With Your Parents: The Young Person's Complete Guide to Financial Empowerment. I know moving back home isn't ideal. But if you really must own a house, the quickest path may bring you back to the family home. Suggested rent arrangement: Parents forgo a monthly rent cheque on condition that a big chunk of money goes into a house-down-payment savings account instead. Two years of saving $1,000 per month brings you most of the way to $25,000, which is 5 per cent of $500,000. That's close to the average price of a house in Toronto's suburbs.
Suck it up and keep renting if you aspire to own a house, or move home. Then wait for falling prices to make houses more affordable. In today's housing market, the trend is your friend.
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