How Millennials Can Prepare for a Real Estate Investment

If you’re a millennial thinking of venturing into the real estate world, there’s a few things you need to learn about before taking your journey. You might be already drowning in student debt, and generating low income, however, knowing how to make your process easier will ultimately help you stress a little less and reach your goal a lot faster.

Think about long term property value

The first step you can take is to do your research and to find a location that matches affordability with long term equity (value) growth potential. Once you figure out where you would like to see yourself living, plan around it. Find out about the local community, restaurants, malls, gas stations, neighbours and school districts. Setting a goal for yourself will not only help you narrow down where you want to live, but make your agent’s job easier in finding what you’re looking for.

Increase your credit score

There is a good chance that your credit score may not be as good as you would hope for it to be due to student loans, job insecurity, or unstable financial circumstances. If you plan on making your purchase within the next few years, it would be a good idea to spend the time leading up to it building a good credit score. Money lending officers will scrutinize your credit score and decide whether giving you a loan would be a good fit for them. Spend some time planning your finances and learn to discipline your spending habits.

Save up

Saving up could be a challenge especially if you are a millennial with student loans. But being able to save can be a testament to your self-restraint and what you can accomplish when you set your mind to it. Taking out a percentage of each of your paychecks and stashing it away, paying off high-interest loans first, making bigger minimum payments, and spending the rest on necessities will help you save a lot quicker.

Know the market

Start out by knowing your budget and how much you’re willing to spend on your home. Match this budget to what your desired location of stay is and work around it. Learn about how long it takes the houses in that area to sell, how many times they’ve been sold, and if the price ever drastically changed. Knowing all this information will validate which home will be the best investment.

An ever-healthy housing market

Despite a fall in sales and a slowdown in prices, the fundamentals underpinning the Toronto housing market remain strong. The impact of a recent rate hike and a slew of measures at the provincial level, largely a 15% foreign buyer tax, have cooled what was once the most dynamic seller’s market in GTA and Southern Ontario history. New data released shows two important trends that underpin the stability and long term strength of the GTA housing market.

The first is that mortgage delinquencies are now at a record low and continue to fall. Data released by Equifax Canada shows that mortgage delinquencies have been falling in Canada, and large banks, like TD, report extremely low rates of default and delinquency. Another important and positive statistic has been the fact that home building has now been found to exceed demand in Toronto. For many years, industry groups, real estate professionals, and some politicians and economists have complained that not even housing stock was being built and that the government should be providing more incentives for builders to develop.

Recent data shows that between 2011 and 2016 there were 146,200 new households in Toronto, compared to the 175,825 homes that were built. This shows that housing supply exceeded established demand by over 30,000 units. While the supply of single detached homes in Toronto remains largely fixed due to space constraints, the latest census data shows that home supply has kept pace with home demand for many years. This proves that the GTA real estate market is adept at responding to the signals of demand and supply.

While having decreased month over month marginally, prices in Toronto are still significantly higher today than they were a year ago. The condominium market is on fire in Toronto, with double digit price and sale increases recorded in the last few weeks. Many realtors are predicting that the double whammy impact of a 15% foreign buyer tax and a small interest rate hike will temporarily cool the market before it heats up again, as was the case in Vancouver. Overall, the Toronto housing market remains rock solid.

Predicting The Future Canadian Housing Market

The Canada Mortgage and Housing Corporation is predicting that the fall in sales and property prices for the Greater Toronto Area will soon come to an end. CMHC pointed to the recent history of the Vancouver market, where a foreign buyer tax had a strong impact in reducing prices and sales volume but where the market quickly recovered. Prices and sales in Vancouver are now higher than before the foreign buyer tax was implemented. The CMHC believes Toronto prices and sales will also rebound in the medium term.

Interest rate increases have exacerbated the slight slowdown in the GTA market but were expected and anticipated. Further interest rate increases before the end of the year and next year are also being factored in by consumers and real estate professionals, and have been hinted at repeatedly by the business press. Canadian banks already have very high standards for issuing mortgages, and so interest rate increases should not come as a shock and are unlikely to dissuade the best prospective home buyers from being approved. Canadian banks’ strict regulations and tight monitoring see them enjoy exceedingly low default rates on multi-billion dollar mortgage portfolios.

In terms of prices, the average condominium cost in Toronto has now hit $500,000.00. While overall prices have declined slightly, the picture is not uniform throughout the city, with some neighbourhoods recording slight price drops and others recording price increases. Realtors are still reporting a tough environment in which to sell but also continue to remain optimistic for the long term. The factors which saw the Vancouver market recover so strongly were its strong, underlying fundamentals. A strong economy, limited space for building, a robust international reputation and great weather all propelled the real estate market back. Toronto enjoys many of the same strengths; limited supply, a strong economy, and a solid international reputation.

If the Vancouver story unfolds in Toronto, prices and sales will recover and potentially exceed pre-foreign buyer tax levels.

A New Market Emerges

Several forces have recently emerged to re-shape what was the most dynamic seller’s market in the history of southern Ontario. The first was the arrival of the summer season and a vast torrent of new government rules, initiatives, intervention and the famous 15% foreign buyer’s tax. The tax has succeeded in dissuading new foreign entrants into the housing market and has helped to reduce demand.

The second force is a surge of new listings that have increased the supply of homes. This increase is helping alleviate one of the great historical shortages of supply in our market but is also contributing to the cooling of prices. The listings surge will continuum for the short to medium term as new construction units and houses reach the market.

The third force has been the recent increase in interest rates announced on July 12th by the Bank of Canada, with another interest rate hike likely in October of this year. The hike will increase borrowing costs for businesses and consumers and will immediately make mortgages more expensive. The real, full impact of higher rates will be felt in the coming years as mortgages are renewed.

Individually, these forces would have had important but not necessarily market shifting impacts. But as they have been combined and implemented in quick succession, the market has balanced itself away from sellers in favour of buyers who for years, had been squeezed out of securing a home by relentless bids, low supply, and very high prices and price growth.

Realtors across the GTA and southern Ontario are reporting lower demand, falling prices, a marked reduction in open house attendance, fewer bidding wars, and fewer foreign buyers. Attractive houses can still be found selling for above listed prices and overall demand and market health remains robust. The new vibe is one of balance between sellers and buyers.

Effects of the Foreign Buyer Tax

On April 20, the Ontario government announced a 16-point housing plan aimed at improving affordability, increasing supply, and protecting renters. The plan’s centerpiece was a 15% Vancouver style foreign buyer tax on properties in the Greater Golden Horseshoe region. In less than 2 weeks, the effects of this plan and the foreign buyer tax are already being felt.

Reactions from realtors have been numerous and strong. Some are saying that the market is beginning to cool and that buying has stalled, while others are reporting that demand is showing no signs of slowing down and that interest and energy remain strong.

The first effect has been a reduction of prices for some homes by a few points, particularly low rises, detached homes, and townhomes in Toronto. Sales were also down by 3.2%. Many new homes have been placed on the market and the supply of listings has soared. Nevertheless, prices generally continue to rise by double digit figures. The increase in April was 25% across the board. The new average selling price for a home in Toronto has now hit just over $920,000.00.

The Toronto Real Estate Board has said that the huge increase in new listings is a positive sign of the market reacting to pent up demand and that if the increases continue the market will become more balanced over the long term. Listings increased by over 33% in April. Although the broader impact of the Fair Housing Plan and the Foreign Buyer tax will take more time to materialize, a close examination of the Vancouver housing market reveals some of the potential long term implications.

Since August 2016, when British Columbia introduced the first Canadian foreign buyer tax in the Greater Vancouver area, prices fell strongly and sales fell by over 25%. However, as of April of this year, prices are again rebounding, with demand for all types of property still strong and increasing. Foreign sales, however, have dropped significantly and continue to fall.

If Vancouver is any indicator, foreign sales, however small, may decline long term in Toronto and the immediate effects on prices, if negative, could correct and rise again in the long run. What is clear is that many homeowners who were on the fence previously or who were waiting to sell are listing their homes now and increasing the supply for buyers.