There’s a new standard for starter homes. Whether in the city centre or in the suburbs, expectations for first home purchases are changing. Square footage and lot sizes are shrinking, and townhouses and condos are becoming the new norm.
While climbing prices aren’t making the same headlines they were in early 2017, the drastic loss of affordability has created a lasting change in the market. Year over year sales have dropped, but prices are still climbing, and we’re seeing the bulk of sales and the highest growth rates in the starter home categories, condos and townhouses.
Larger homes have less demand than they did 5 years ago. It’s not that people don’t want larger homes (though there is a shrinking demand for sprawling houses), but there is a much smaller pool of buyers who can afford the price point of these homes. In cities like Toronto, much of the population is even priced out of townhomes and larger condo units. People are either moving further away, or they’re looking at smaller and smaller homes.
This is happening across much of the province. In the suburbs, condos and townhomes are growing in demand as prices rise and single-family homes are getting too expensive for many first-time buyers. Prices are still considerably lower than in the Toronto core, but neighbouring suburbs have still seen massive percentage increases, which has changed the types of homes people can afford.
Inflation is Normal, BUT…
While inflation is normal, the level that the housing market has seen in the last generation has far surpassed income level growth and has changed the types of homes people can afford. People still need houses, but new home buyers won’t be able to afford the same types of homes as their parents.
Starter homes are the properties most first time buyers purchase to enter the real estate market. However, these homes are also purchased by retirees, investors, and people who need less space.
The demand is there for the least expensive homes possible, which means smaller dwellings. Developers are matching the demand with more townhome and condo developments going up and far fewer single-family homes.
Obviously, a large part of this change comes from affordability. Condos and townhomes cost less than single family homes, so people who could only afford $XXX for a home, are now forced to look at smaller homes or further away from the city centre to get a house with that same budget.
The other reason for the change is that the buyer is changing. Today’s first-time home buyer is spending more time working, commuting, and time on the couch watching TV. They aren’t looking for the same time-commitment to housework and yard work that previous generations took on with large family homes. People want easy-to-maintain and minimal workfrom their home.
Open concept living isn’t a new trend, but many rooms are being removed from floor plans. This is especially true in starter homes. Gone are the formal dining and living room where people hosted dinner parties. Gone are the gardens and yards where summer barbeques were held, where children played, where dogs romped. These new homes are designed for a new generation of home owners. Busy, young, hard-working individuals who look at a home as a place to sleep and lay on the couch to binge watch TV.
The busier we become, and the more tied to technology we are, the less house people need or want. They may want a more high-tech house, but the need for square-footage is disappearing. For good or bad, there is a new generation of homeowners, and the new smaller homes are matching the demand of the market.
If you are solely relying on your income to save for the down payment of a home, it is tough. Without some other source of income, your 9:00-5:00 job won’t be enough to get you into your dream home, and possibly won’t be enough to even get you into a house, period.
Look at the median salary in Canada. Right now, the average person is making about $50,000 a year. A single person making $50,000 can roughly afford a home in the mid to high $200s, and in today’s market that’s not a lot. A couple, making a household income of $100,000 (both making the average Canadian salary) can afford mid to high $500s, and that’s based on having a 20% down payment.
Here are the average home prices in the GTA for 2017…
Anyone making the average salary is priced out. Couples can afford a condo, but nothing larger without moving outside of the city, which either means a complete relocation or they’re now commuting to work.
Going back to the down payment, many first-time home buyers aren’t entering the market with 20% down. To beat the market, many home buyers are looking to buy as soon as they can, and that means 5%-10% down and paying for mortgage insurance. Even then, home ownership, especially family homes are becoming nearly impossible to afford for the next round of first-time home buyers.
So, Where Does This Leave Investors?
So, where does this leave investors?
Well, if you already have investment properties, congratulations, you own something valuable.
As the market continues to go up, fewer first time home buyers will be able to afford to buy, or they’ll only be able to afford a place too small for their needs. That means more young people are going to be looking at renting long term. There will be a need for starter homes and family homes up for rent. The need for a place to live is still there, and if they can’t afford to own, then they are going to rent.
A rent to own option may be another hot offer thanks to the current market. If house prices are outpacing savings, or there is the risk that they will, people may choose to lock into a lease with an option to buy where there is a legal, agreed upon buyout price for the home. This gives a sense of security to future homebuyers because they get to move into their home before they have the necessary resources to purchase it, but they also know exactly what it will cost them to buy the home when the time comes.
In both cases, there’s a growing supply of good tenants for your property who will take care of it and treat it as their own. You’ll also have someone else paying down the loan on your asset. Everyone wins!