Perhaps the question that everyone wants to know is how are Canadians affording homes that are so expensive when compared to the standard average salary in the city they live in? Regardless if the housing market is in decline like Calgary or Vancouver, or steaming hot like Toronto, Halifax and Montreal, house prices in Canada have increased exponentially while wages have remained relatively flat.
This has led to a huge disparity between those who have and those who don’t. In fact, it’s not much about the wage gap that devastates Canadians, but a wealth gap. The reality of it is that those that own real estate are much well off than those that don’t own real estate.
This has led to the younger generations, who have been shut out of the real estate market, to start complaining about the inequality. It’s not much so that they don’t have decent paying jobs, it’s that the jobs themselves can’t even afford the accommodations they want to live in.
So how do Millennials and future generations get into a housing market that is well beyond their reach?
Make It Your Life Goal
The first step to accepting home ownership in an expensive country like Canada is that you have to make it your life goal. This means that many sacrifices have to be made. This blog preaches financial independence, but this might be one of the things you need to sacrifice.
Taking on a mortgage that is 8-10 times your average annual gross salary means that it will take a minimum of 17-20 years to really pay that off. Unlike the previous generation where home prices were only 3-4 times average gross salary, they were able to pay it off much faster with inflating wages. This doesn’t look to be the case for the current generation.
Achieving home ownership means prioritizing your life to make sure the mortgage is paid off first and everything else comes second. It’s an important life decision to make which may affect your career, the number of kids you may have, vacations and luxuries. It’s not a decision to take lightly when trying to achieve home ownership.
There’s nothing wrong with making this a goal in life. It’s always been the North American dream to own land. This is a question that only you can answer and no financial blog can make this decision for you. If a home makes you happy, this is something you should really consider.
Bank of Mom and Dad
Since the previous generation has been so well off, it doesn’t hurt that they give a little assistance right? Using the bank of mom and dad is probably one of the most important resources that many Canadians have utilized to get into the expensive Canadian housing market.
Your friends might not tell you, it may seem a little taboo, but generally some assistance is necessary to get into a home in expensive cities like Toronto and Vancouver. Parents are always willing to help out if they can because they don’t want their children to be “paying someone else’s mortgage”. Why not grow equity instead of throwing money away?
For those that are fortunate enough to have parents help with a big down payment, it can really help bring down monthly payments and the amount of interest that needs to be paid on a home. Eliminating a fifth of a mortgage can be a tremendous benefit because it can help you qualify for a 30 year mortgage rather than a 25 year mortgage. On top of that it can help eliminate the extra thousands of dollars that need to be paid for CMHC insurance. Every little bit counts.
This is where getting into a home earlier really helps. A lot of people don’t understand how a person with an $80,000 salary could possibly buy a million dollar home, but this is still entirely possible.
If an individual had bought a house 10 years ago with a purchase price of $300,000 with only 10% down payment, that home could be worth upwards of $800,000 now in a market like Toronto and Vancouver. Over those ten years, the balance that would have been paid off would be roughly $120,000.
This means if the person sells this home now at $800,000, they would be holding $520,000 in cash. Taking that money and putting it on a $1,000,000 home now could be possible. After buying a $1,000,000 home the mortgage left over would only be $480,000.
Now the great thing about this is that a $480,000 mortgage at current interest rates that can go as low as 2.99% over 30 years. This means someone buying a million dollar home only has to pay around $2,000 a month which is extremely doable making $80,000 a year.
The after tax income of $80,000 in Ontario is roughly $5,250 a month. At only 38% paying towards a mortgage a bank would most likely approve such a transaction. This is an extreme case of leverage where taking only $30,000 to start can turn into a $1,000,000 asset in only ten years. How’s that for gains?
Don’t Fear Debt
Debt has become quite acceptable in this day and age. Everyone is in debt. The US government, the Canadian government, our neighbours, your barber, your banker, heck maybe the 8 year old kid selling lemonade at the end the street has debt. The list probably goes on and on.
With interest rates so low and expected to go even lower, it seems like many Canadians have no problems paying off their debt load. In fact, Canadians spend almost 15% of their take home pay just on interest. Despite this fact, officials still say Canadians can handle it.
If you are looking at buying a house, you have to be comfortable with managing debt and not taking in more than you can handle. That’s because the majority of what you pay for the home in the first 15 years is usually towards interest. In the latter half of the mortgage that’s where the principle repayments get bigger.
Get the mortgage debt down is really the main goal throughout your career. That’s what you work for. Just ensure that the debt remains manageable and owning a home shouldn’t be too difficult.
Take Your Own Step
Many Canadians own million dollar homes. That’s just a fact with our ever rising real estate prices. That doesn’t mean you need to buy one as your first home. Getting yourself into an affordable home is the first priority. Like one of my previous examples, once you build equity in your home you can always move up.
Owning a less expensive home doesn’t really make you a lesser person. You still own a home. You still have property. Stop trying to compare yourselves to others and the vanities that other families might have in their home and just enjoy yours. There will always be differing degrees of priorities for everyone.