It appears that the dream of home ownership is alive among younger Canadians, but the ability to make it come true may be slipping. RateSupermarket.ca, the online mortgage shopping site, says that fewer than half of today’s millennials believe they could afford a home in their region. For older Canadians, (born before 1979) the number is closer to two-thirds (59 per cent). Most millennials still believe in home ownership, however; 91 per cent said that buying a home was an important milestone in life, and a solid majority (72 per cent) do not consider renting a good use of their money. Furthermore, there’s a lot of anxiety about the rising costs of home ownership: 88 per cent of millennials worry that they’ll be priced out of the market.
Nevertheless, even with the affordability challenges, 72 per cent of millennials expect to buy a home over the next five years, according to the RateSupermarket survey results. Of those, nearly half say they will buy a condo or townhouse because that is what they can afford. Clearly, this demographic will be important to the real estate market over the coming few years.
Being able to afford a home in a strict technical sense—you meet the mortgage lender’s requirements for income and debt-service ratio—doesn’t necessarily mean buying a home is the right decision at this time.
Save, and don’t put all your eggs in one basket
Typical advice to younger buyers includes saving as large a down payment as possible, while allowing for the extra costs of homeownership—new furniture, repairs, taxes, insurance, maintenance. Purchasing a home that will be suitable for longer than one or two years is another. Generally speaking, though not necessarily in a hot market like Toronto, buyers who stay in a home for five years or longer have a greater chance of recouping costs and making a good return on their investment.
Some advisors are cautioning that putting all of one’s savings into a down payment on a home that becomes the only asset could be risky. What if you overpay for the home and then the market takes a dive? What if you lose your job in an economic downturn and can no longer afford the monthly payments?
Liquidity is an important indicator of general financial health, according to the US Federal Reserve. Earlier this year it published a research paper on household wealth accumulation among four demographic groups: whites, blacks, Hispanics, and Asians. The groups were further divided according to age and education achieved, and the results were gathered over twenty-one years.
To characterize the quality of a household’s financial decision making, the researchers devised a simple score card of five questions, one of which concerns the liquidity of the household assets. A household that has a higher share of “safe and liquid assets” is in a better position than one that does not, as it can sell the assets to raise cash quickly at low cost.
Take the financial health test
Each of the following questions can be answered with a yes or no, giving a score of 0 or 1. The highest possible score is 5, the lowest 0.
- Did you save any money last year? Score 1 for a yes.
- Did you miss any payments on any obligations in the past year? Score 1 for a no.
- Did you have a balance on your credit card after the last payment was due? Score 1 for a no.
- Including all of your assets, was more than 10 per cent of the value in liquid assets? Score 1 for a yes.
- Is your total debt service (principal and interest) less than 40 per cent of your income? Score 1 foryes.
According to the researchers, the scores derived from the answers to these simple questions were very good at predicting how much wealth any given group would have accumulated. The highest average score among all the American groups was 3.12, though certain sub-groups did score higher.