Toronto real estate is super expensive, which is why there’s so much political support for first-time buyers… right? What if we told you first-time buyers might be a large part of why prices are so high? Altus Group, a massive real estate insight company, published survey results on first-time buyers. The claim that first-time buyers need more support to get into the market seems to be largely unfound. In fact, the survey showed that inexperienced buyers are likely a significant driving force in this price expansion.
Toronto Real Estate Buyer Characteristics
Toronto real estate buyers have been relatively young, inexperienced, and don’t make all that much cash. Over the past 5 years, 4 in 5 buyers were less than 50 years old. 1 in 2 buyers were first-time buyers. 6 in 10 had household incomes lower than $100,000 per year. 4 in 10 used a high-ratio mortgage, meaning they had a downpayment lower than 20% of the value at purchase. Also, a third of these buyers are on variable rate mortgages. We know, you can’t pay attention to anything other than half of recent buyers were first-time buyers. Shatters quite a few narratives.
Source: Altus Group. Better Dwelling.
How Did First-Time Buyers Pay For Their Home?
First-time buyers actually represented a significant portion of the market, but how are they paying for these homes? Using an aggregate of survey sources, Altus found that 79% of homebuyers tapped non-RRSP savings and investments for their downpayment. 36% used savings and investments held in their RRSPs. 49% of them used gifts and private loans from friends and family. 12% tapped their inheritances, and another 7% used a line of credit. The survey data runs from 2014 to 2018, and Altus notes it includes multiple sources which add up to more than 100%.
Source: Altus Group.
First-time buyer sources of downpayment is interesting, because of the concentration of net-worth. By selling or removing income from their investments and RRSPs, like 79% and 36% of people did, they’re placing a lot of risk in a single asset class. Further, those that borrowed the downpayment from friends and family, also have less equity in the home than most people assumed.
One more takeaway is re-considering the effectiveness of first-time homebuyer programs. Typically, although never publicly discussed, first-time homebuyer programs are expanded at the end of a housing cycle. The reason being the end of the housing cycle means a rise in unemployment, creating distressed asset holders. The “overhang” is thus reduced by allowing first-time homeowners to help mitigate some of the losses of distressed buyers. If half the market is already first-time buyers, Toronto will be creating a lot less liquidity than expected.
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