Canada’s first-time buyers may be in for some volatility, and they don’t even know it yet. Earlier this year, the Canada Mortgage and Housing Corporation (CMHC) warned first-time buyers that leaving just a 5% downpayment could be problematic. If the market had a sudden sharp turn, they could suddenly see their downpayment wiped out in a matter of weeks. This is a big issue in markets expecting significant declines in home prices – like Toronto and Vancouver. Now it appears that’s exactly what’s happening, with a typical condo buyer at 5% losing as much as a third of their downpayment in a month.
Evan Siddall, the head of the CMHC, did something unusual earlier this year – he didn’t motivate buyers. Instead, he warned first-time buyers to question the motivation of people saying prices will rise. He further added, if you do buy in this environment, try to make a bigger than minimum downpayment. Emphasizing this could be particularly troublesome in high-flying markets like Toronto and Vancouver. This is somewhat unusual from an organization designed to help stimulate buying. Why would he do that?
The problem with leaving the minimum downpayment is it increases risk. Not just downpayment risk, but social and economic risks as well. If you leave just 5% down, and prices drop 5%, you’ll have to pay to sell. This creates a disincentive to move, which could prevent you from relocating for a better job.
This could also mean you could have to ride out negative equity – a drag on wealth building. For example, some people in the US that bought at peak in 2006, are still underwater. In other words, the issue isn’t just defaulting on your home. It’s a negative on your personal wealth and prosperity as well. Despite this, a lot of people went ahead anyway, with some agents anecdotally suggesting a surge in first-time buyers. So far, they aren’t doing so hot in Toronto or Vancouver.
Toronto Condo Buyers With 5% Down Lost Over 30%
Greater Toronto condo apartment buyers lost a significant chunk of change last month. The benchmark price of a condo apartment was $601,300 in May, and a 5% downpayment would be $30,065. The benchmark fell $9,600 in June, which would have wiped out about 31.93% of that downpayment. In other words, people with 5% equity would be sitting on just 3.4% a month later.
Canadian First-Time Condo Buyers With 5% Downpayment Get Slaughtered
The percent change in equity by June, for a May benchmark condo apartment buyer with a 5% downpayment.
Source: CREA, Better Dwelling.
In the City of Toronto, the declines are a little more steep than the whole region. The benchmark price was $633,600 in May, and a 5% downpayment would be $31,680. The benchmark price fell $11,400 in June, thus wiping out 35.9% of that downpayment. A May buyer of a benchmark with 5% down, would be left with 3.2% equity a month later.
Vancouver Condo Buyers With 5% Down Lost Over 16%
Greater Vancouver didn’t do quite as bad as Toronto, but it didn’t exactly do great. The benchmark price of a condo apartment was $686,500 in May, and a 5% down payment would be $34,325. The benchmark fell $5,700 in June, wiping out 16.6% of that downpayment. A May buyer of a benchmark with a 5% down, would be left with 4.1% equity a month later.
Canadian First-Time Condo Buyer Equity Remaining On 5% Down
The percent of equity a May benchmark condo apartment buyer with a 5% downpayment would have left in June, by MLS region.
Source: CREA, Better Dwelling.
In the City of Vancouver, the market of Vancouver West is where the biggest hits are being taken. The benchmark price of a condo apartment was $801,300 in May, and a 5% down payment would be $40,065. The benchmark fell $12,000 in June, wiping out 29.9% of that downpayment. May’s benchmark condo owner would be left with 3.5% equity a month later.
These numbers are just one month in, which doesn’t necessarily make a trend. However, it is a substantial single-month decline most people aren’t discussing. A number of firms have now forecasted declines, which they state won’t happen until the second half of the year. Organizations like the CMHC have stated Toronto and Vancouver will see the largest price declines. At least one bank has forecasted the declines will hit condo apartments hardest.
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