Even “Second-Time Buyers” need help from mom & dad
A housing bubble is a huge party. Everyone gets drunk and has a good time. The economy booms because housing, particularly construction, is a very local business. It creates local jobs. People spend this money. Businesses get this money. Governments exact their pound of flesh. But there is a drawback to a housing bubble, beyond the fact that it will eventually crash with terrible consequences: New entrants into the market are getting locked out by soaring prices.
Canada’s housing bubble has been a sight to behold. Home prices only dipped 8% when the US housing market crashed. Then it re-soared. Now, across the country, home prices are 26% higher than they were at the already crazy peak in 2008. In Toronto, they’re 42% higher! Prices in the major urban centers where young people like to live have become a challenge for first-time buyers.
First-time buyers are special. One, they’re the foundation of a healthy housing market; they represent growth. And two, they don’t benefit from any run-up in home prices. Current homeowners profit from the housing bubble by owning a home that has gotten pricier. When they move, they sell an overpriced home, which soothes the pain of buying another overpriced home. But first-time buyers feel the full brunt of the bubble price.
So the Bank of Montreal (BMO), in its Home Buying Report, determined just how difficult it’s getting in Canada. The survey found that 42% of the potential first-time buyers, those hardy folks that haven’t been discouraged by the soaring prices, expect to recruit the help of mom and dad, and in a big way.
To begin with, which is not a good sign, first-time buyers whittled down their budget by C$3,400 on average from last year to C$312,700 (US$259,000).
By comparison, the median home price in the US, according to the NAR, was $212,000 in March. First-time buyers in the US are struggling too, and many have thrown in the towel. They accounted for 30% of all homebuyers in March, down from 40% during normal times. But first-time buyers tend to buy below the median price. So their Canadian counterparts have to jump over much higher hurdles.
They plan to put down almost C$60,000, according to the BMO survey. But since they don’t have this kind of money, they expect to ask their parents for C$37,500 on average.
Even current homeowners who want to move to another home – the second-time buyers – are having a tough time dealing with their dreams, which have grown beyond their reach despite my elaborate theory above. And so 42% of them, same proportion as first-time buyers, are expecting financial help from their folks.
But they’ve got a much bigger nut to crack: they expect to spend on average C$473,900 (US$391,000) and make a down payment of C$123,000. But they don’t have it. So they expect their parents to contribute about C$95,000!
“Whether buying a first home or moving onto another home, we’re seeing more and more buyers embark on the journey with help from family,” is how the report explained this phenomenon.
And to deal with this crazy housing market, first-time buyers get increasingly intrepid: the number of those willing to enter into bidding wars jumped to 48%, a big increase from last year, when only 35% were willing to do so. Second-time buyers are more reticent. Only 36% said they’d enter into a bidding war.
But running over competitors and chasing prices higher has an impact: “The increase in competition from a growing number of Millennial buyers is helping to push up prices….”
We knew it. It’s their fault.
In the US, a Redfin survey reported that 49% of its agents found that the single greatest challenge for first-time buyers wasn’t getting a mortgage or anything like that, but finding a home on the market that they could “actually afford.” Another 27% cited competition from other buyers [read… Here’s What’s Killing the American Dream].
“The lack of affordability has changed the market quite a bit,” commented WOLF STREET contributor Melissa Terzis, a realtor in Washington, D.C. “What we are seeing in DC is that most first-time buyers are now coming to the table with financial assistance from their parents.”
No word on second-time buyers yet. But the way prices have been rising….
Canada’s housing bubble is truly magnificent. Since 2000, home prices have jumped 140%. A number of years book double-digit gains, fired up by easy money, a resource boom that has now crashed, and in certain metropolitan markets an influx of wealthy, motivated foreign buyers. So home prices in Vancouver and Toronto are expected to continue rising “over the next few months.” But in other cities, the party has already ended. Read… Magnificent Housing Bubble Unravels in Much of Canada
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It would be interesting to know whether these parents are drawing down on savings to help their kids or are they taking out equity loans.
Probably both. Given the debt to disposable income ratio, which is at a sky-high record to where even the Bank of Canada worries about it, it looks like a lot of that money gets borrowed on the parents’ credit.
A 26% increase from 2008 to 2015 represents 4.2% increase each year for the 17 years.
Not very much on an annual basis – infact you might argue that values havn’t kept up with (real) inflation – ergo house prices have fallen compared to inflationary trends.
Malcolm, I think your “17 years” was probably a typo. I’m sure you meant “7 years.”
The period includes the decline after the crazy 2008 peak. It includes a period of negative CPI during the financial crisis. Even in Canada, wages haven’t gone up at that rate. Also, in some metros, like Edmonton, home prices shot up before the financial crisis in a crazy way, then fell during the financial crisis and oil bust, then rose again, but didn’t quite make it back up all the way. Check the article I linked. I provides some detail on the different metros.
2008 was the peak of the prior crazy housing bubble. And now, on average, home prices are 26% higher than at that peak of the prior crazy housing bubble :-]
“Not very much on an annual basis”
but 1000% more than my income increases……which ceased to happen in 1997
Sounds like the Australian Dream. Two very similar situations.
Is there anything really new here? Back in the 70s, here in the southeast, most of the people we knew bought first or second homes with their parents help. My wife and I didn’t want to take money from our parents because we believed that, as two college educated people, we should be able to stand on our own. And our parents had done plenty for us already. As a result, we didn’t buy until the early 90s. We were ready to upgrade in the mid 2000s, but got priced out by the bubble. Thought we would be able to move on up after the crash, but still haven’t, not wanting to be “the greater fool” in an over-priced market.
I looked at foreclosures last night and some high end properties are coming on the market, being sold by the banks in our area. I suspect they are sitting on many more of these properties, trying to keep prices propped up. No doubt with a little help from our friends at the Fed.
You’d be spot on in your evaluation: banks and other financial institutions are sitting on a veritable mountain of property to try and keep prices propped up, all over the world.
Just in my area I can think of an increasing number of houses that would be called “prime property” just sitting there, locked, often allowed to deteriorate and not on the market.
The banks’ problem is, of course, that builders aren’t sitting idly. In some parts of Europe a mini housing bubble kicked in 2012-2013, resulting in the glut in supply getting worse. This led to artifical attempts to “balance” prices upwards, often with tragi-comical results. You have builders suspending construction of new units to drive up prices of finished housing they have sitting idly nearby: people go see this property and walk away, as the view from their front porch, consisting in an idled construction site, is far from inviting.
But more often than not, the buyers just do not materialize. And this is despite record-low mortgages, often just around 150bps over LIBOR. People are finally waking up to the fact housing is not an investment and, with so much property on the market and property taxes climbing steadily upwards, renting makes much more economic sense: if local taxes go up too much, children arrive or whatever other reason, you can just move somewhere else and not worry about losing money on the deal.
This is manipulation is leading to all sorts of comical end results.
My main bank, which is this country’s largest, will soon open a realtor division. This is to attempt shifting all the housing they have sitting idly and units they get handed by builders as part of sundry financing deals for new housing… in turn this will lead to even more price manipulation as nobody will want to drop prices: the idea that housing can only go up in price is still too strong.
Oh, and recently I had a chat with a bank executive which sums it all up nicely.
He told me “We are making almost no money on mortgages right now. At these rates it would be worth our while only if volume increased at least threefold, but it won’t happen. First time buyers are disappearing: young adults simply don’t earn enough or, given they are stuck in a limbo of part time jobs, cannot qualify for a mortgage. And those who earn enough often keep on renting since they know they have the upper hand due to so many houses on the market”.
He also hinted at the fact that, despite the hard lessons of the past decade, lending standards may be dropped, just as it was done last year for auto loans. There’s lot of political pressure in parts of Europe due to the misguided idea that banks are “too tight” with credit and that a next to zero interest rates on loans are a “right”.
Bankers may be crooked, but they aren’t stupid.
“we didn’t buy until the early 90s”
i bought in 1991 and was upside down until 2000….then it went nuts, got divorced and sold it in 2005, made a nice profit (that the X got all back in child support payments) She went and re-bought right at the peak and was upside down until 2014.
so in 24 years of home ownership between her and i there’s only been ~6 years of NOT BEING UPSIDE DOWN……..what a racket
Insane is the best way to describe what’s been happening in Canada’s housing market. Here, on the outskirts of Toronto, in a smallish town we moved to twenty years ago (that ironically coined the moniker ‘Country Close to the City’ a few years ago but is increasingly anything but thanks to local politicians chasing the growth dream), the population has skyrocketed, suburban home construction has exploded, and the local paper’s most recent edition printed an article highlighting that resale home prices increased 13.6% last year to an average of $726,900. The growth has been ‘spectacular’ but I’m sure the fall will be just as ‘awesome’; of course, everyone will be convinced ‘no one saw it coming’.
Our daughter and son in law saw a chance to move up to a 3200sq. ft. house to put their large family in. 600k, she figured she would net 400k from her sale of her house that is four years old and paid 348k for. They wished to purchase from a builder, list their house and hopefully get what they wanted out of their existing house sale, then load up on new mortgage money to cover. They asked for assistance from the old farts. After a lot of words the answer was no. Sales are slumping here and the guarantee to sell is not certain. The house two doors down, was listed for 349k, reduced to 339k and then promptly sold. No where near the 400k the daughter anticipated she would get for her home. We told her to sell her home and take the money left on closing and the buy an existing home. She said there were non in the inventory in the city that met her requirements. Right!
Welcome to Canada’s housing bubble. More like a nightmare for a lot of people.
I wish it would be pricked somehow.
Between this and the home equity loan ponzi, where people with equity borrow against it in order to lend at a higher rate, now the effects of the crash will bring down far more people.
On another note, our neighbor listed her place 2 months ago here in West Vancouver, the most upscale, desirable district of Vancouver.
We live 2 blocks from the water and a dream like neighborhood. Yet, 2 months later, she has no offers and just fired her realtor.
Her price is within the norm, the place is beautiful, there’s no flaws I’m aware of, in fact she just renovated the deck and kitchen.
The market here is what I call “spotty.” Some sellers get a hot and heavy buyer who’s been imbibing the Kool Aid and is willing to pay any price, and of course those are the stories realtors repeat to fuel the fire, but there’s also stories like my neighbor, who put a bid on a place contingent on selling her current home, and months later sits waiting for a buyer.
Here’s something that’s crazy. My parents own a 2 acre lot 30 minutes outside of Ottawa. Originally they bought the place back in the 1970’s for around 30,000 and now it’s worth over 1 Million. It’s zoned for commercial, residential and industrial and our property taxes are 13,000 a year. My Dad keeps getting the place re-evaluated every few years to reduce the taxes because the City keeps upping property values.
I think the entire Gov’t is in on it federally, provincially and municipally. By upping everyone’s property values on a yearly basis.
I recently had to move my store out of the City core and into my parents building because the City Rents we’re just to damn high. It’s sad to think that im making over 100,000 a year before taxes with a store and still have trouble paying bills because my Rent is set at 3,800 a month and the average Commercial Rent here in Ottawa is now around 30 dollars a sq/foot. For me now it is making much more sense to just buy property in the city and move back. But commercial property is all well over 1 Million, so it leaves me with looking at buying a large home and converting it into a store and re-zoning the property. But who knows, will see what happens.
I do believe the end is drawing near for this bubble, but when is anyone’s guess.
You should do an article on the Commercial real estate bubble as well. I do believe there is a crash coming in this sector as well as I am seeing more and more ” lease ” signs popping up everywhere. I do believe this is because of the Retail Sector having lots of problems. The media makes you believe that he problem with Retail is Internet taking it away from brick and mortar stores but I do not believe this is the case. I believe the problem with Retail is the consumer is just plain ” Tapped Out ” from the ever high cost of living. I also believe there is no more money to be made in the middle end of Retail and that the money is now in the bottom end and High end, but even the bottom end is very tight with an enormous amount of saturation.
Mark, thanks for sharing your experiences and providing some numbers. I live in San Francisco, and things are going nuts here in the same manner.
I’m with you on commercial RE. As you suggested, it deserves some attention. I did one post on it (mostly office market in Calgary and Vancouver), and more will be coming. Here is the one from April 5:
Thank you Wolf. Maybe a comparison between both Retail Vs. Office space both in Canada and in the USA. I think we are seeing the very beginnings of something bad and idk what all of these Hedge Funds and Unions who are going around purchasing Malls and Office buildings are going to do when it all goes belly up. Especially the Unions who are depending on the Rent Revenues from Malls to pay there Union members Retirement Funds. That’s another area to too look into as well is the money being sank into commercial properties.
Here too they have the new scam of ” Reits ” so you go to your stock broker and ask him to invest in ” Reits ” for you. I’m not sure if they have Reits in the USA? It looks like there just trying anything to keep it going for as long as possible.
I know having some American friends that the market in the USA is literally all over the place. My X lives 200 miles outside of Nashville in a tiny one horse town with a 2 acre lot that she spent 80,000 back in 2008 and with property taxes being 800 bucks a year, which made my jaw drop. Meanwhile u go downtown Nashville and it’s not really too too bad compared to other areas, but still high nonetheless. It can go as high as it is here, to rock bottom. I think they have pumped it back up again since 2008 in those high area’s and they have re inflated it back to a 2nd bubble. And this 2nd bubble is going to go pop along with again… Commercial RE.
But at any rate something to research into for both Canada and the USA.
I’m hoping too that the Fed has the Balls to hike interest rates this year as well !
There is no recovery in the US. Further, if the Fed raises interest rates, the derivatives market will have severe problems and the financial system might crash.
God, don’t let it pop yet! Most tradesmen (in Ottawa, anyways) are pulling in well over 100K/year, in this new home construction “boom.” I’m not sure who keeps buying them, but they sure keep slapping them together.
I just need another year or two before she blows; then it can tank all it wants!
Hey James, my Uncle was a Carpenter here in Ottawa for around 40+ years, he has seen the good and the bad. In the 80’s he used to get paid well over 50 dollars an hour and that was a lot of cash back then. Then everything went bust and his pay got slashed. He is well retired now, but I do believe the same thing is happening again. Everything works in cycles. It’s as though a lot of Canadians have forgotten the other oil boom from the 80’s with Peter Pocklington remember what happened to him.
I believe the shit will hit the fan in Harper’s last term. He should b re-elected at the end of the year, so everything should start hitting the fan in the next few years. He should also leave office early, I don’ think he will stick around for 4 more years once he is elected. Maybe by 2017 or 18.
Make it while u can and get out is what I say. I could be wrong but my opinion for the day
If I were you, I’d have a Plan B. It’s starting to hit the fan already. Canada cannot withstand $50-$55 oil, though politicians say so. There’s going to be very severe consequences within a few months, now that we’re almost a year since oil started falling.
This bubble pop will be worse than the last because it’s already manifesting as unsold inventory.
Banks and construction firms don’t want to sell below cost — they don’t want to put the loss on their books and admit insolvency — so they’ll let the buildings be vacant and deteriorate rather than dropping the prices. Which will injure whole neighborhoods… causing a death spiral in prices…