Using your RRSP as a first-time home buyer: advantages and disadvantages

For first-time home buyers, it can feel intimidating when you want to try and buy a home. Beyond the work of seeing houses and facing competition in the market, you also simply need to have enough money saved to cover your down payment. Many first-time buyers are younger and haven’t had as much time to save or reach their high-earning years in their careers, making even a minimum down payment feel out of reach.

Making enough money for a home will never be easy, but luckily there are some programs to help make it at least a little bit easier for first-time home buyers. One popular program is the Home Buyers’ Plan (HBP), which allows buyers to collect tax savings using their Registered Retirement Savings Plan (RRSP) to fund a home purchase.

The HBP is undoubtedly not a bad option, and many Canadians have used it to help buy their first home. However, it may not be for everyone. You need to be aware of some downsides before you withdraw money from your RRSP to buy a house.

In this article, we will explore funding a home purchase with your RRSP, how it works, and look at some of the advantages and disadvantages of using the Home Buyers’ Plan to buy your first house.

What is an RRSP?
Before you can understand the Home Buyers’ Plan, you need to know how your RRSP works. Hopefully, if you have been contributing to your RRSP, you already know this, but maybe you haven’t begun using an RRSP yet or need a refresher.

In brief, your Registered Retirement Savings Plan (RRSP) is a tax-deferred retirement savings account, so any RRSP contributions you make for the year are deducted from what you owe on taxes. An RRSP is not truly tax-free, as you will need to pay taxes when it comes time to withdraw the money you have saved.

You also will not be taxed on any capital gains made within the account, such as through investments, as long as the gains remain within the account. The idea is to help Canadians save money while they are in their prime earning years while also getting a tax break and then withdraw it in retirement when your marginal tax rate is lower.

As long as your RRSP isn’t locked-in, you can still withdraw the money whenever you want, but you will simply need to pay taxes on the amount like any other income. You will also lose any contribution room used when you put the money into the account.

RRSPs are one of Canada’s most popular registered accounts, so many people have a lot of money saved within one. If you are many years from retirement, it can be tempting to dip into a bit of that money, especially if you want to buy a house. Luckily, the CRA provides you with an option to do just that.

What is the RRSP Home Buyers’ Plan?
The Home Buyer’s Plan is a federal program designed to help Canadians buy their first home with funds from their RRSP. Under the home buyers plan, you can use money from your RRSP while still enjoying the tax savings. However, there are some significant limitations to this option.

How much you can withdraw
First, your withdrawal under the home buyer’s plan is limited to $35,000 per buyer. Your spouse may also withdraw that amount for the same home purchase, allowing you up to $70,000 for your down payment. You also need to have saved that money in the first place unless you choose to go with an RRSP loan.

The amount you withdraw does not incur any taxes and can be put toward a home purchase. When withdrawing money through your Home Buyers’ plan, you will need to provide your financial institution with a T1036 form indicating the purpose of the withdrawal. Otherwise, it may not count towards your HBP loan, and you may end up paying tax on the money you take out.

Repayment rules
Using the home buyers plan, you have 15 years to pay back the amount, with a one-year grace period before repayment starts. You will not need to pay interest, and because the value of the loan and the repayment period are fixed, you will have the same yearly payment for the entire 15 years. If you withdrew the maximum amount under the home buyers plan, you would pay about $2,333 per year for 15 years or around $194 per month on top of your mortgage.

Paying your Home Buyers plan loan will not affect your RRSP contribution limit, as the money has already technically been contributed. This means you can still contribute your yearly amount on top of your loan repayment. However, any amount you repay on the loan is not deductible, as you already saved the tax on those dollars when you first contributed them to your RRSP.

The penalty for missed repayment on a Home Buyers plan loan is not very severe. When you fail to make a payment towards your Home Buyers plan loan, the missed payment amount will simply be treated as any other withdrawal from an RRSP and will be counted as taxable income for the year. Your principal still goes down, and you will simply owe more come tax season.

Also, be sure to designate any repayments as such, or you risk the Canada revenue agency counting it as a regular contribution. This can lead to you missing your payment and potentially exceeding your contribution limit.

Who is qualified for the Home Buyers’ plan?
To take advantage of the Home Buyers’ Plan, you must meet some qualifying criteria. First and most obviously, you will need to be a first-time home buyer, meaning you or your spouse have not owned a home in the last four years.

You will need to be a Canadian citizen or permanent resident, and you will need to withdraw funds all at once or in multiple installments within a single calendar year. You must use the money for a home purchase, so you can’t spend it on just whatever you want. The funds you withdraw must also be in your RRSP account for 90 days prior to withdrawal, which will be essential to know if you are borrowing or being gifted money into your RRSP.

You must also occupy the home you plan to buy, so you can’t use the Home Buyers Plan to buy an investment property you won’t live in.

Advantages of using the Home Buyers Plan
There are clear advantages to using the Home Buyer’s Plan to buy a home.

For one, it allows you to save income tax on a significant amount of your down payment, which can mean a lot of extra money in your pocket. It is also an interest-free loan, meaning the amount you borrow is the amount you will pay without any added costs. Finally, you have a long time to pay it back, meaning not only is the financial impact spread out, but you also still get to have that money in your RRSP when it comes time to retire.

Disadvantages to using the Home Buyers Plan
Savings required
One of the biggest issues with using the Home Buyer’s Plan is that it requires a significant amount of savings to be most beneficial. Those with an extra $35,000 saved can make the most of the Home Buyers’ Plan. The higher your income, the more you can save, and your income tax rate will be higher, making the HBP’s advantages even greater. However, for those who make less and save less, the benefits of the Home Buyers’ Plan will be reduced.

Long term loan
The Home Buyers’ Plan repayment is fixed at 15 years, meaning you commit yourself to a long-term loan repayment schedule. This means 15 years of increased home costs and 15 years when you could potentially miss your repayment and be charged taxes.

This may also be a problem if you plan to retire and use your RRSP within 15 years. The one upside is that you can prepay early for no penalty.

Missing out on RRSP income
Saving into your RRSP is one thing, but making the most of it is another. Many people choose to invest in their RRSP. When it comes to investing, it’s always best to have as much as possible as early as possible to take advantage of compound interest. Though retirement may seem far away, the number of years until you retire are limited, and every year counts in investment growth.

By taking $35,000 out of your RRSP, you miss out on the potential growth of that money if it were invested. Though it will be back in your account after 15 years, that’s 15 years you missed out on investment growth. On the other hand, this money is technically being invested in your home, so you may still see some returns. This is not necessarily a downside, but you must consider where your money is best spent based on your expected investment returns and personal goals.

Repaying your Home Buyer’s Plan loan may also limit your ability to continue contributing to your RRSP further, leading to years of playing catch up. In this case, you would also be missing out on the tax benefits of the RRSP for future years.

Is it right for me?
Though there are downsides to using the Home Buyer’s Plan to borrow from your RRSP, they are far from deal-breakers. The Home Buyers plan will not be for everyone, but it is an excellent option for some. The person who will get the most out of the home buyers plan is anyone with a large amount of savings already in their RRSP and who makes a significant income.

This means that you will be able to withdraw the maximum amount and benefit most from the tax savings of having contributed. In addition, a high income will help with repayment and allow you to contribute at the same time, allowing you to continue making tax deductions.

As your savings amount and income go down, so does the feasibility of the Home Buyers’ Plan. However, it may still be a good idea if you expect your income to increase in the coming years. You can save the taxes now, and your loan will become even easier to service over time, meaning there are few downsides if you keep on top of your payment schedule.

Suppose you are deciding between using the Home Buyers’ Plan or withdrawing directly from your RRSP and paying the tax. In that case, it will be in your best interest to use the HBP as you can retain the contribution room by repaying the plan, which is not an option with a straight withdrawal.

If you are considering using the Home Buyers’ Plan for your first home purchase, consider talking to a tax professional or financial advisor. They can offer you a more in-depth understanding of how the program can benefit your particular financial situation.

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Is lack of supply still the biggest obstacle to housing affordability? This panel thinks so.

The topic of housing supply isn’t front and centre of the affordability discussion like it was just a few months ago.

Despite housing affordability in the first quarter posting its worst decline “in a generation,” according to recent data from National Bank of Canada, the public’s focus is now squarely on inflation, rising interest rates and falling home prices.

And for good reason. Inflation is at a 30-year high, mortgage rates have more than doubled from their record-lows of last year and the average national home price is down 8%, as of April, from its February peak. In many local markets, prices are down well in the double-digits.

However, the lack of new housing supply remains the root cause of housing un-affordability in Ontario. At least that was the consensus of a virtual panel discussion last week hosted by Teranet.

Its panelists included Tim Hudak, CEO of the Ontario Real Estate Association (OREA), Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board (TRREB), and Joe Vaccaro, founder and president of RIOS Real Estate Operating System.

All three were in agreement that new housing construction isn’t keeping up with demand, in large part due to the province’s rapidly growing population.

“Most new Canadians want to be in the Greater Golden Horseshoe because it’s where the opportunity is,” said Mercer. “Also, unlike previous generations of immigrants, today’s new Canadians are coming with education and money to invest in homeownership. So, the market is getting bigger every year and the supply doesn’t change.”

Ontario welcomed 107,865 immigrants between July 1, 2020, and June 30, 2021, and that was down from the previous year due to COVID restrictions. In 2019, over 150,000 people moved to Ontario.

Hudak reminded the panel that demand pressures aren’t just being felt in the GTA.

The topic of housing supply isn’t front and centre of the affordability discussion like it was just a few months ago.

Despite housing affordability in the first quarter posting its worst decline “in a generation,” according to recent data from National Bank of Canada, the public’s focus is now squarely on inflation, rising interest rates and falling home prices.

And for good reason. Inflation is at a 30-year high, mortgage rates have more than doubled from their record-lows of last year and the average national home price is down 8%, as of April, from its February peak. In many local markets, prices are down well in the double-digits.

However, the lack of new housing supply remains the root cause of housing un-affordability in Ontario. At least that was the consensus of a virtual panel discussion last week hosted by Teranet.

Its panelists included Tim Hudak, CEO of the Ontario Real Estate Association (OREA), Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board (TRREB), and Joe Vaccaro, founder and president of RIOS Real Estate Operating System.

All three were in agreement that new housing construction isn’t keeping up with demand, in large part due to the province’s rapidly growing population.

“Most new Canadians want to be in the Greater Golden Horseshoe because it’s where the opportunity is,” said Mercer. “Also, unlike previous generations of immigrants, today’s new Canadians are coming with education and money to invest in homeownership. So, the market is getting bigger every year and the supply doesn’t change.”

Ontario welcomed 107,865 immigrants between July 1, 2020, and June 30, 2021, and that was down from the previous year due to COVID restrictions. In 2019, over 150,000 people moved to Ontario.

Hudak reminded the panel that demand pressures aren’t just being felt in the GTA.

 

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What is mortgage default insurance?

You can get insurance for almost anything you own and often it is considered a very good idea to do so. Home insurance protects thousands every year from the financial cost of damage to their property and car insurance helps to cover the costs of unexpected auto collisions. If it’s an expensive replacement or repair, chances are you can get insurance on it. But, what about mortgage insurance – why is it different from most insurance policies people get?

You may have heard about mortgage insurance while in the process of working to buy your home. As a home buyer, you may have a choice to opt for mortgage insurance, though in many cases, you will not have a choice and it is required. Understanding what mortgage insurance is and what it means to you will be a crucial step in getting a mortgage that works for you.

In this article, we will explore what exactly mortgage default insurance is, who needs to get a mortgage insurance policy, and what it means for your mortgage.

What is mortgage default insurance?
Mortgage default insurance is quite different from most forms of insurance that consumers get. The basic concept is in the name: it’s insurance that protects against a defaulted mortgage. However, when a borrower defaults on a mortgage, most of the financial damage is done to the lender and not to themselves. Therefore, mortgage default insurance protects your lender, not you – you just get to pay the costs.

A mortgage default is essentially any breach of a mortgage contract. This could include a missed payment or any other violation of the mortgage terms. Often, your bank will work with you to correct your default so you can continue paying, but in extreme circumstances, the bank has the right to execute power of sale.

In this case, the bank will sell your home and use the proceeds to cover the money they borrowed. Sometimes this sale does not cover the cost of the mortgage due to poor market conditions, damage to the home, or other factors. This is where mortgage default insurance will come in to cover the loss to the banks.

It is also important to know that while mortgage insurance protects your lender, it doesn’t mean that you are off the hook in the event of a default. The mortgage insurer may still come after the borrower to cover the cost of insurance.

Qualifying for mortgage default insurance
There are a number of criteria that a borrower must meet to qualify for mortgage default insurance. These may include:

  • A home value of less than $1,000,000
  • A down payment minimum of 5% for the first $500,000 and 10% for any value above
  • Maximum Gross Debt Service ratio and Total Debt Service ratio of 32% and 40% respectively
  • Amortization period no longer than 25 years
  • A credit score of at least 600

These are general guidelines and qualifying criteria may change with time and vary between providers. Be sure to check with your provider for the most up-to-date criteria.

Why is mortgage default insurance needed?
Mortgage default insurance, along with measures like the mortgage stress test, is an important financial tool to mitigate risk in Canadian mortgage lending. On an individual level, a defaulted mortgage without insurance is costly to lenders. Looking at the broader picture, if there were an increased amount of defaults, this could cause a large shock to our financial system. Mortgage debt is the single highest type of debt in the economy and is a massive amount of the banks’ lending. Mortgage insurance is designed to protect the banks that are the foundation of our economic system and to mitigate large scale financial losses.

Mortgage insurance is also important because, as we will explore later, it makes high ratio loans more secure. Any mortgage loan under 20% is considered riskier to banks, so these loans are required to have mortgage insurance.

Mortgage insurance is also a key aspect of mortgage-backed securities as it allows bundled mortgage debts to be sold as reliable investment products. Only insured mortgages are eligible to be sold as part of security, reducing the risk of these investments somewhat.

Do I need mortgage default insurance?
Whether or not you need mortgage default insurance will come down to your down payment value. By law, any mortgage with a loan to value ratio above 80% will be required to take out a mortgage default insurance policy. As mentioned above, these loans are riskier to banks and default insurance can help reduce this risk. If you are opting for a high ratio mortgage, getting default insurance will not be a choice, though you may still be able to choose between a few mortgage default insurance providers.

Beyond the question of if you need mortgage insurance is the question of whether or not you should choose to get it. You always have the option to pay upfront for a higher down payment and avoid the need for mortgage default insurance. On the other hand, you may also choose to get mortgage default insurance for a loan with a 20% or higher down payment.

But, should you?

In general, it’s usually best to go with as high of a down payment as possible. Not only will this help to reduce or eliminate your default insurance premiums, but it will also give you more flexibility for mortgage terms.

That being said, you should evaluate how realistic it is to increase your down payment. If you are just short of 20%, waiting to save in order to increase your down payment or looking for a slightly less expensive home may be worth it. On the other hand, if you were planning to make the lowest down payment possible, it may take overly long to save 20% and it will be more worth it to simply buy now.

Finally, you could technically get mortgage insurance on a loan with 20% or more down, but this is not really your best option. If not required, mortgage insurance is just an extra cost you don’t need to pay. If you think you will default on your mortgage any time soon, it may be better to reevaluate your choice to get a mortgage rather than simply pay extra for insurance.

How much does mortgage default insurance cost?
One of the biggest questions that people have when it comes to mortgage default insurance is just how much it will cost them. Naturally, if you are trying to pay the minimum down payment, you’re probably interested in keeping the amount you spend as low as possible. The price of mortgage default insurance can be substantial, but it will vary based on a number of factors.

The biggest factors determining your cost of mortgage default insurance will be your loan size and your down payment amount. The cost of mortgage default insurance is determined as a percentage of your loan’s total value. This means the more expensive the home, the higher your total cost of insurance. This percentage also scales inversely with your down payment amount. This means those paying the lowest down payment will also need to pay the highest premiums by percentage, and vice versa.

Payment of mortgage insurance can be done all at once or it can be added to your mortgage’s principal and paid over time. This will save you money upfront, but cost you more over time with interest and increase your monthly payments.

There are three major providers of mortgage insurance in Canada: the Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Genworth Financial. Each will have similar policies and terms with slight variations between them.

The rates for CMHC mortgage insurance are as follows:

  • 4% for down payments below 10%
  • 3.10% for down payments between 10% and 15%
  • 2.8% for down payments between 15% and 20%

In some provinces premiums are also subject to sales tax.

Let’s look at a cost example of CMHC mortgage default insurance. If you wanted to buy a home with a purchase price of $750,000, your minimum possible down payment would be about $50,000, or around 6.7%. The price of your mortgage default insurance premium would be 700,000 x 4%, or around $28,000 for a total mortgage value of $728,000. For comparison, a 20% down payment ($150,000) on the same home would have a mortgage of only $600,000, and with a 4.7% fixed interest rate would pay about $700 less a month. Over the course of 25 years (assuming your rates stayed the same and you did not refinance) this would mean an additional payment of almost $90,000 in interest on the insured loan.

While you pay more over time, there is also value to buying early. For example, five years spent saving for a larger 20% down payment also means you are five years behind on building your home equity. In a market with a lot of appreciation, the headstart in equity can quickly outweigh the cost of insurance and you will be able to access it sooner through options like a HELOC.

Conclusion
Mortgage default insurance is a good compromise between home buyers and banks. Buyer’s are able to buy sooner for a lower upfront cost, while banks are able to offer high ratio mortgages at reduced risk. Whether or not you decide to get mortgage insurance will come down to your personal circumstance. You should consider consulting with a mortgage broker if you want to learn more about what your options are.

 

 

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Canada’s Office Construction Slips As Cost to Build Rises: Report

The construction of office space is declining in Canada amidst runaway inflation increasing construction costs.

A new report from Colliers Canada has found that although the number of under-construction offices is still very robust, with more than 15.7M sq. ft being built, that number is down from its earlier peak.

The office space that is going up is largely concentrated in downtown Toronto and Vancouver, Colliers notes. And there’s plenty of interest for it in those markets. In Toronto, downtown office occupancy is up 24%, compared to just 7% at the beginning of the year. And as the report states, employee attitude towards both travel and work safety has improved.

“Coupled with the warmer weather, this has led to a renewed vibrancy in the streets of the downtown core,” the report reads. “In the face of uncertainty regarding hybrid work, tenants have turned to experts in real estate and design to explore options for creating appealing and functional spaces for their employees, with flexibility and future-proofing at the forefront of tenants and designers’ minds.”

In Vancouver, demand is outpacing office supply, pushing the city’s office vacancy rate to fall to 5.8%.

“Larger office tenants form the most active segment but face a limited number of available options which continues to shrink,” the report reads. “Smaller tenants appear to be taking a wait-and-see approach as larger companies navigate the complexities of return to office strategies.”

But not everyone is jumping right back into the office real estate market. As the report says, the three already-implemented Bank of Canada interest rate hikes are causing significant drains on people’s wallets, giving pause to tenants and investors alike.

“Both tenants and investors have felt the impacts of the recent Bank of Canada interest rate hikes and their effects on consumer spending,” the report reads. “Tenants who do not have immediate space needs are taking the ‘wait and see’ approach to leasing, while higher interest rates have increased the cost of borrowing, leading to a smaller pool of buyers.”

Canada’s industrial market is similarly on the rise, experiencing a “bull run driven by fulfillment centres,” the report says. Across the country, rents are rising and vacancy has dropped below 1%. In major markets, the vacancy rate is even lower, hitting a minuscule 0.1% in Vancouver and 0.2% in Toronto.

Industrial rent prices are also on the up and up, rising 30% annually in some markets. In the Greater Toronto Area in particular, asking rental rates are up 35% year over year. Colliers notes that typically in the past, net rental rates would be discounted if tenants leased more space, but that discount is being offered much less frequently, if at all.

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Over 22M housing units needed by 2030 to solve affordability crisis: CMHC

A new report from the Canada Mortgage and Housing Corp. says the country’s housing stock would need to climb to over 22 million units by 2030 to achieve affordability for everyone living in Canada.

The housing agency notes that two-thirds of the supply gap is found in Ontario and British Columbia, two markets that have faced major declines in affordability.

Around 2003 and 2004, an average household would have had to devote close to 40 per cent of their income to buy an average house in Ontario, and close to 45 per cent in British Columbia. As of 2021, that number is close to 60 per cent.

The report says additional supply would also be required in Quebec, as affordability in the province has declined over the last few years.

Achieving housing affordability for everyone in Canada will require developers to become more productive and make full use of land holdings to build more housing, CMHC says.

The agency also says governments must make regulatory systems faster and more efficient as well.

 

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Developers could cancel approximately 5,000 new condo units as construction prices rise, industry observer says

Developers could cancel the construction of approximately 5,000 new condominium units in Toronto in response to rising material and labour costs, an analysis conducted by the real estate research firm Urbanation has found.

Urbanation President Shaun Hildebrand shared the results of the analysis with CP24 on Tuesday.

He said building costs that are up approximately 20 per cent year-over-year are now rising “much faster” than real estate, which could result in some projects “no longer being economically feasible to proceed with.”

Rising labour costs amid record low unemployment are also a factor, according to Hildebrand.

“This is being exacerbated by supply chain issues caused by the pandemic and the war in the Ukraine and it is contributing to very, very strong increases in costs to the point now where construction costs for condos are up 20 per cent year-over-year and they are growing much faster than prices,” he said. “It is not just the 5,000 units that are already in the market that could cancel, it is all of the projects that should have launched over the next little while that are no longer going to be entering into the market. So that puts the supply squeeze not only on today but years down the line when these projects ultimately get delivered.”

Real estate prices have already started to soften amid an aggressive interest rate tightening cycle being taken by the Bank of Canada.

Hildebrand said that Toronto has been in the midst of a “condo boom” for some time, so overall supply should remain strong with about 87,000 units currently under construction and 33,000 more in the pre-construction stage.

But he warned that there will be some “collateral damage” due to the fact that “costs are rising very quickly at a time that prices are starting to soften.”

In that case he said that buyers will be entitled to have their deposits returned to them under Ontario law, but not necessarily with appreciation.

“Unfortunately, it could be years between when that deposit is paid and when they actually get their money back and in the interim prices could have escalated quite a bit and they are not usually able to get that appreciation from that deposit, which in some cases shoves the purchasers out of the market,” he said.

Data from the Toronto Region Real Estate Board has previously suggested that home prices have now fallen for three straight months. The average price of a Toronto home was, however, still up 10 per cent year-over-year in May.

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Ranked: These Are 10 of the World’s Least Affordable Housing Markets

These Are 10 of the World’s Least Affordable Housing Markets

It’s become increasingly difficult for middle-class families to purchase a home over the last few years—and the global pandemic has only made things worse.

According to Demographia’s 2022 Housing Affordability Report, the number of housing markets around the world deemed “severely unaffordable” increased by 60% compared to 2019 (prior to the pandemic).

This graphic looks at some of the least affordable housing markets across the globe, relative to median household income. The report covers 92 different cities in eight nations: Australia, Canada, China, Ireland, New Zealand, Singapore, the United Kingdom, and the United States.

The Least Affordable Housing Markets
Before diving in, it’s worth outlining the methodology used in this report, to help explain what’s classified as a severely unaffordable housing market.

To calculate affordability, a city’s median housing price and divided by its median household income. From there, a city is given a score:

  • A score of 5.1 or above is considered severely unaffordable
  • 4.1 to 5.0 is considered seriously unaffordable
  • 3.1 to 4.0 is considered moderately unaffordable

All the cities on this graphic are classified as severely unaffordable⁠—and, for the 12th year in a row, Hong Kong takes the top spot as the world’s most unaffordable housing market, with a score of 23.2.

One reason for Hong Kong’s steep housing costs is its lack of supply, partly due to its lack of residential zoning—which only accounts for 7% of the region’s zoned land. For context, 75% of New York City’s land area is dedicated to residential housing.

Sydney moved up one spot this year, making it the second most expensive city to purchase a home on the list, with a score of 15.3. Besides Hong Kong, no other city has scored this high in the last 18 years this report has been released.

There are several theories for Sydney’s soaring housing rates, but industry expert Tom Forrest, CEO of Urban Taskforce Australia, boils it down to one fundamental issue in an interview with Australia Broker—supply isn’t keeping up with demand:

“Housing supply has been consistently not meeting demand in the Greater Sydney and across regional New South Wales…if you have supply consistently not meeting demand then the price will go up. That’s what happened and we’re seeing it in abundance.

”TOM FORREST, CEO OF URBAN TASKFORCE AUSTRALIA

The COVID-19 Impact
Middle-income earners were already feeling the squeeze prior to the global pandemic, but COVID-19 only exacerbated housing affordability issues.

As people began to work from home, high-income earners started to look for more spacious housing that wasn’t necessarily in the city center, driving up demand in suburban areas that were relatively affordable prior to the pandemic.

At the same time, supply chain issues and material costs impacted construction, which created a perfect storm that ultimately drove housing prices up.

But with interest rates rising and COVID-19 restrictions easing around the world, some experts are predicting a market cool down this year—at least in some parts of the world.

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Canada home prices – why they’re falling

House prices are set to continue falling across Canada as a result of the current market cooldown, with the only question being by how much, according to a well-known economist.

Benjamin Tal (pictured), deputy chief economist at CIBC World Markets, told Canadian Mortgage Professional that the decline in value was likely to be most evident among low-rise properties, although he said that should be taken in the context of skyrocketing price appreciation in recent years.

“I think [prices] will go down in the low-rise more significantly than in the condo space. It depends where you live, what kind of neighbourhood, but you can see that low-rise is already down by roughly 15-20%, and that’s something that might continue,” he said.

“Remember, we’re talking about extremely elevated levels where prices went up by 50% in two years – so to see a decline of 15-20% is not crazy when interest rates [are] rising as quickly.”

As interest rates rise across the board, and with the Bank of Canada having introduced sizeable recent hikes to its benchmark policy rate, home sales figures have tailed off significantly in many of the country’s main markets.

That’s been accompanied by the first drop in the national home price index since April 2020, by 0.6% between March and April to around $866,700, with Southern Ontario markets such as London and Cambridge posting some of the most marked declines (4% and 3.9% respectively, said the Canadian Real Estate Association).

A new analysis by RBC Economics’ Robert Hogue indicates that recent central bank rate hikes have cooled homebuyer sentiment and are likely to negatively impact home prices in the long run.

“Interest rate hikes [are] straining affordability and weighing on property values, especially in expensive markets,” Hogue said.

House prices are set to continue falling across Canada as a result of the current market cooldown, with the only question being by how much, according to a well-known economist.

Benjamin Tal (pictured), deputy chief economist at CIBC World Markets, told Canadian Mortgage Professional that the decline in value was likely to be most evident among low-rise properties, although he said that should be taken in the context of skyrocketing price appreciation in recent years.

“I think [prices] will go down in the low-rise more significantly than in the condo space. It depends where you live, what kind of neighbourhood, but you can see that low-rise is already down by roughly 15-20%, and that’s something that might continue,” he said.

“Remember, we’re talking about extremely elevated levels where prices went up by 50% in two years – so to see a decline of 15-20% is not crazy when interest rates [are] rising as quickly.”

As interest rates rise across the board, and with the Bank of Canada having introduced sizeable recent hikes to its benchmark policy rate, home sales figures have tailed off significantly in many of the country’s main markets.

That’s been accompanied by the first drop in the national home price index since April 2020, by 0.6% between March and April to around $866,700, with Southern Ontario markets such as London and Cambridge posting some of the most marked declines (4% and 3.9% respectively, said the Canadian Real Estate Association).

A new analysis by RBC Economics’ Robert Hogue indicates that recent central bank rate hikes have cooled homebuyer sentiment and are likely to negatively impact home prices in the long run.

“Interest rate hikes [are] straining affordability and weighing on property values, especially in expensive markets,” Hogue said.

House prices are set to continue falling across Canada as a result of the current market cooldown, with the only question being by how much, according to a well-known economist.

Benjamin Tal (pictured), deputy chief economist at CIBC World Markets, told Canadian Mortgage Professional that the decline in value was likely to be most evident among low-rise properties, although he said that should be taken in the context of skyrocketing price appreciation in recent years.

“I think [prices] will go down in the low-rise more significantly than in the condo space. It depends where you live, what kind of neighbourhood, but you can see that low-rise is already down by roughly 15-20%, and that’s something that might continue,” he said.

“Remember, we’re talking about extremely elevated levels where prices went up by 50% in two years – so to see a decline of 15-20% is not crazy when interest rates [are] rising as quickly.”

As interest rates rise across the board, and with the Bank of Canada having introduced sizeable recent hikes to its benchmark policy rate, home sales figures have tailed off significantly in many of the country’s main markets.

That’s been accompanied by the first drop in the national home price index since April 2020, by 0.6% between March and April to around $866,700, with Southern Ontario markets such as London and Cambridge posting some of the most marked declines (4% and 3.9% respectively, said the Canadian Real Estate Association).

A new analysis by RBC Economics’ Robert Hogue indicates that recent central bank rate hikes have cooled homebuyer sentiment and are likely to negatively impact home prices in the long run.

“Interest rate hikes [are] straining affordability and weighing on property values, especially in expensive markets,” Hogue said.

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47% of Canadian Gen Z Say Returning to the Office Factors into Home Buying Plans

Survey Highlights

  • Nearly half (47%) of urban Canadian Generation Z adults rank proximity to their workplace as a top priority for the location of their first home purchase; however, just 15% indicate that buying in or close to the downtown core is a priority.
  • 40% plan to purchase their first home in a major city, while 42% plan to buy in a suburb outside of a major city. 7% expect to buy their first home in a small town and 3% expect to do so in a rural area.
  • 48% of Calgary’s Generation Z adults plan to buy their first home in a major city, surpassing those who plan to do so in Toronto (37%) and Vancouver (36%).
  • 7 in 10 (73%) of Canada’s urban Generation Z adults plan to buy their first home in their current city of residence or within a one-hour drive, with 41% of all respondents planning to buy their first home in their current city and 32% planning to buy within a one-hour drive of their current city.

 

TORONTO, June 01, 2022 (GLOBE NEWSWIRE) — As employees and employers negotiate new possibilities for remote and hybrid work as the COVID-19 pandemic evolves, a newly released generational trends report by Mustel Group and Sotheby’s International Realty Canada highlights new insights revealing that future housing demand will be underpinned by an expectation for a return to the workplace and office, as well as a balanced preference for urban and suburban living amongst Generation Z home buyers.

Newly released Mustel Group/Sotheby’s International Realty Canada survey results reveal that nearly half (47%) of urban Generation Z adults in Canada’s largest metropolitan areas rank buying a home “close to work” as being a top priority for the location of their first home purchase, although just 15% indicate that purchasing in or close to a downtown core is a priority. Proximity to work is surpassed only by neighbourhood safety as a key location characteristic, with safety being cited by 56% of survey respondents overall. Other priorities for a first home locale include proximity to a grocery store (39%), transit friendliness (36%), living close to family (35%) and walkability (34%). According to survey results, the lowest neighbourhood priorities for a home purchase are cycling friendliness, cited by 8% as a key factor, and living near nightlife such as clubs and bars, reported by 5%.

Survey findings also reveal an almost even distribution between urban Generation Z adults who plan to purchase their first home in a major city, reported by 40%, and those who plan to buy in a suburb outside a major city reported 42%. Approximately one in 10 expect to buy their first home in a small town (7%) or rural area (3%). 8% remain undecided as to the community type of their first home.

Furthermore, survey results reveal a preference for urban Generation Z first-time buyers to remain in or close to their current cities of residence. 41% plan to purchase their first home in their current city of residence while 32% plan to buy within a one-hour drive of their current city. A further 11% plan to buy further afield but within Canada; this includes 6% who plan to buy their home more than a one-hour drive from where they currently reside and 5% who expect to purchase in a different Canadian province. A nominal 1% plan to buy outside of Canada, while 13% are still unsure where they will buy their first home.

“Location, Location, Location: Generation Z Trends Report” is the third report in a multi-part series based on Canada’s first in-depth study of the housing intentions, aspirations and preferences of Generation Z. The report is based on a survey of 1,502 Generation Z Canadians who are over the age of majority and between the ages of 18 and 28 in the Vancouver, Calgary, Toronto and Montreal Census Metropolitan Areas, and focuses on this cohort’s priorities and criteria for the neighbourhood and location of a first home.

Previously released research by Mustel Group/Sotheby’s International Realty Canada reported that 75% of urban Canadian Generation Z adults say that they are likely to buy and own a primary residence in their lifetime. Approximately half of urban Generation Z adults are most likely to purchase a higher-density housing type as their first home, with 25% reporting that their first home purchase will likely be a condominium, 18% saying that their first home will be an attached home/townhouse and 7% stating that their first home purchase will be a duplex/triplex. 39% reported that they are most likely to buy a single family home as their first residence. According to earlier reports, 37% of urban Generation Z adults in Canada expect to purchase their first home in less than five years, while 43% anticipate buying between five and ten years from now. 30% expect the purchase price of their first home to be $350,000–$499,999, while 26% expect to pay $500,000–$749,999.

“Previously released results from Mustel Group and Sotheby’s International Realty Canada survey of urban Generation Z adults have already revealed that young Canadians have a high level of confidence in real estate and intend on purchasing a home,” says Josh O’Neill, General Manager of Mustel Group. “This new report uncovers insights into where they plan to buy their first home, and the factors that are driving this important life decision.”

According to Sotheby’s International Realty Canada experts, surprising divergences have emerged in the neighbourhood and location preferences of different generations of home buyers as pandemic restrictions ease, and as engagement in social and community activity renews across the country. Evolving workplace and work-from-home preferences are driving new and evolving trends not only in the workplace but in housing demand, particularly amongst Canada’s youngest generation of first-time home buyers.

“During the pandemic, the desire, need and ability to work remotely influenced and enabled some Canadians to relocate to outlying suburban or recreational regions to achieve more space and a more desirable lifestyle. This helped drive record real estate sales activity across the country. While the question of work-from-home flexibility remains a defining workplace issue for the foreseeable future, attitudes about remote work amongst employees and employers are shifting as pandemic restrictions relax, and there are differences in perspectives between generations that will affect housing demand,” says Don Kottick, President and CEO of Sotheby’s International Realty Canada. “Younger Canadians are more likely to prefer a hybrid of working in the office and working from home, compared to older Canadians who are more likely to prefer remote work. Our research signals that for Generation Z, buying their first home in a neighbourhood close to their workplace will remain a top priority, regardless of whether they plan on purchasing in a major city or suburb. This has significant implications for how cities and suburbs should approach planning in order to enhance the quality of life and housing for future generations.”

Kottick cites research from the Angus Reid Institute that reveals generational differences in Canadians’ workplace preferences, with three in ten (29%) of 18 to 34-year-old adults reporting a preference to work from home entirely, compared to two in five (42%) of those over age 54 saying the same. Statistics Canada also reports that as of April 2022, 19% of Canadian workers usually worked exclusively from home, down from 24% in January 2022; however, the share of employees working at home whether exclusively or through a hybrid arrangement varies significantly across Canada’s metropolitan areas.

“As the cost of housing and the cost of living becomes increasingly challenging for young people in major cities, government, the real estate industry and the private sector will be challenged to consider Generation Z’s demands for real estate close to their workplaces, and in communities, they can afford,” says Kottick. “This may require planning for a future where jobs and office spaces are distributed beyond downtown cores and hyper-concentrated business centres in central municipalities, with smaller peripheral municipalities and suburban areas playing a more significant role in hosting both commercial and residential real estate opportunities.”

Market Highlights

Vancouver

In a metropolitan area that saw its employment rate climb to 64.4% in April 2022 as its unemployment rate held steady at 5.4%, newly released Mustel Group/Sotheby’s International Realty Canada survey results reveal that a significant percentage of Vancouver’s Generation Z adults are integrating plans for working outside of their homes into considerations for their first home purchase.

As in the case of other metropolitan areas, Vancouver’s Generation Z adults rank buying a home “close to work” as being a top priority for the location of their first home purchase, with 43% citing this as a major neighbourhood consideration, however, only 11% indicated buying in or close to the downtown core as being a priority. Neighbourhood safety is the only location characteristic to surpass proximity to work as a priority neighbourhood consideration and was reported by 54% of Vancouver survey respondents as such. Other leading location priorities include proximity to family (40%), transit-friendliness (39%), proximity to a grocery store (38%) and walkability (31%). The lowest neighbourhood priorities for a home purchase are cycling friendliness, reported by 7% as a key location consideration, and proximity to nightlife such as clubs and bars, reported by 6%.

While 36% of Generation Z adults in the Vancouver metropolitan area plan to buy their first home in a major city, 44% say that they will do so in a suburb outside of a major city. 9% plan to buy their first home in a small town, while 4% plan to purchase in a rural area. 6% are still undecided on the community type of their first home.

Survey findings also show that a significant proportion of Vancouver’s Generation Z first-time home buyers plan to remain in or close to their current city of residence: 45% plan to purchase their property in their current city of residence while 28% plan to buy within a one-hour drive. 10% will buy their first home more than a one-hour drive from where they currently reside, while 3% plan to buy in another Canadian province. 0% plan to buy outside of Canada, however, 13% are still unsure of where they will buy their first home.

Calgary

Bolstered by the revitalization of the local economy which has propelled the employment rate to 66.7% as of April 2022 even as the unemployment rate declined to 7.2%, Generation Z adults in Calgary are amongst the most optimistic of Canada’s major metropolitan markets about their prospects for primary homeownership. Encouraged by housing prices and costs of living that remain affordable relative to other major Canadian cities, 78% report that they are likely to own a home during their lifetime, with 53% indicating that they are “very likely” to do so, according to previously released Mustel Group/Sotheby’s International Realty Canada reports.

According to newly released survey results, Calgary’s Generation Z adults rank buying a home “close to work” as being a leading priority for the location of their first home purchase, signalling their expectation of working outside of the home in some capacity. 47% report proximity to work as a major neighbourhood consideration, however, just 16% indicate that buying in or close to the downtown core is a priority. Other leading priorities for a home location include neighbourhood safety (62%), proximity to a grocery store (49%), as well as walkability (34%) and proximity to parks and nature (34%). The lowest neighbourhood priorities for this generation in Calgary when buying a first home are proximity to schools, reported by 8% as being a key factor, cycling friendliness (9%) and proximity to nightlife such as clubs and bars (9%).

Calgary’s Generation Z adults are more likely than those in Toronto and Vancouver to buy their first home in a major city at a rate of 48%, compared to 37% of their counterparts in Toronto and 36% of those in Vancouver who plan to do so. 38% of those in Calgary say that their first home will be purchased in a suburb outside of a major city, 4% plan to buy their first home in a small town and 5% plan to buy their home in a rural area. 4% remain undecided.

Mustel Group/Sotheby’s International Realty Canada survey findings reveal that a significant percentage of Calgary’s Generation Z home buyers plan to do so in their current city of residence, at a rate of 48%, while 25% plan to buy within a one-hour drive. 4% plan to buy their first home more than a one-hour drive from where they currently reside, while an additional 6% specifically plan on doing so in another Canadian province. 1% plan to buy outside of Canada, while 12% are still unsure of where they will purchase their first home.

Toronto

According to newly released survey findings from Mustel Group/Sotheby’s International Realty Canada, Toronto’s Generation Z adults are not only primed for homeownership, the majority are also ensuring that their first home purchase integrates plans for a return to the workplace or office.

While the employment rate of the nation’s largest metropolitan area economy rose to 63.5% in April 2022 and the unemployment rate fell to 6.3%, newly released survey results reveal that Toronto’s Generation Z adults rank proximity to work as a top priority for the location of their first home purchase, indicating clear anticipation of their return to the workplace or office in some capacity. 46% report that buying a home close to work is a key consideration for the purchase of their first home, however, only 16% report that buying in or close to the downtown core is a key location priority. As in the case of Vancouver and Montreal, neighbourhood safety is the only location characteristic to outstrip proximity to the workplace as a priority consideration for the location of a first home purchase, reported by 56% as such. Other top priorities include proximity to a grocery store (39%), transit friendliness (35%) and walkability (35%). For Toronto’s Generation Z, the lowest neighbourhood priorities for a home purchase are cycling friendliness (9%) and proximity to nightlife such as clubs and bars (3%).

37% of Toronto’s Generation Z adults plan to buy their first home in a major city compared to 42% who say that they will do so in a suburb outside of a major city. 8% plan to buy their first home in a small town, while 3% plan to purchase in a rural area. 10% remain undecided on the community type of their first home.

Findings from the Mustel Group/Sotheby’s International Realty Canada survey reveal that a significant percentage of Generation Z home buyers in Toronto plan to do so in their current city of residence, at a rate of 40%, while 36% plan to buy within a one-hour drive. 7% plan to buy their first home more than a one hour drive from where they currently reside, while an additional 3% specifically plan on doing so in another Canadian province. 1% plan to buy outside of Canada, while 13% are still unsure of where they will purchase their first home.

Montreal

In Montreal, 79% of Generation Z adults say they are confident that they will buy a primary residence in their lifetime with 37% expecting to buy their first home within five years and 46% expecting to do so in five to ten years, according to a previously released Mustel Group/Sotheby’s International Realty Canada report. Newly released survey results now indicate that they are poised to do so with a return to the workplace and office in mind. The results are released at a time when the employment rate in Montreal rose to 63.3% in April 2022, while the metropolitan area’s unemployment rate fell to 4.8%.

Generation Z adults in Montreal report that proximity to work is a leading priority for the location of their first home purchase, signalling that working outside of the home in some capacity is anticipated by this cohort. While 50% report that proximity to work is a major location factor in their home purchase, just 17% say that buying in or close to the downtown core is a priority. Other top location priorities for a home include a neighbourhood’s safety (57%), proximity to a grocery store (38%), being close to family (36%) and transit friendliness (35%). For this generation of home buyers, buying in a cycling-friendly neighbourhood or one that is close to nightlife such as clubs and bars, rank as the lowest location priorities, with 8% and 6% indicating that these are priorities respectively.

43% of Montreal’s Generation Z adults report that they plan to buy their first home in a major city, while 41% say that they their first home purchase will be in a suburb outside of a major city. 7% plan to buy their first home in a small town, while 2% plan to buy their home in a rural area. 8% remain undecided on the community type for their first home purchase.

According to Mustel Group and Sotheby’s International Realty Canada, 38% of Montreal’s Generation Z home buyers plan to do so in their current city of residence while 32% plan to buy within a one-hour drive. 5% plan to buy their first home more than a one hour drive from where they currently reside with an additional 8% specifically planning to buy their first home in another Canadian province. 3% plan to buy outside of Canada, while 14% are still unsure of where they will purchase their first home.

The report is based on findings from a survey employing an online methodology using a robust panel of 1,502 Generation Z adults between the ages of 18 and 28. in the Vancouver, Calgary, Toronto and Montreal Census Metropolitan Areas (CMAs). The panel is maintained to be representative of the Canadian population and provide high quality data. Panelists are recruited by a double opt-in method from large databases of reputable channels using industry standards of panel quality assurance, validation, verification and best practices for panel management. The sample was weighted to match Statistics Canada census data based on age, household income and home ownership within each CMA and to bring the total sample into proper proportion based on relative populations. While margins of error only apply to random probability samples, the margin of error on a random probability sample of 1,502 respondents is ±2.5 percentage points, 19 times out of 20, and ranges from ± 4.5 to 5.4 points for 325 – 476 respondents). Data for this report series was gathered from October 25 to November 10, 2021. Please note that percentages cited may not add to 100% due to rounding.

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Toronto home sales down 39 per cent in May from last year, prices up almost 10 per cent

The Greater Toronto Area housing market is becoming more balanced as May home sales dropped 39 per cent from a year earlier and prices rose almost 10 per cent, the Toronto Regional Real Estate Board said Friday.

The Ontario board found last month’s home sales totalled 7,283, down from 11,903 in May, 2021, and 7,989 this past April.

The board and brokers attributed the drop in sales to higher borrowing costs that materialized because of interest rate hikes and were coupled with inflationary pressures that weighed on spending.

However, they found buyers had more negotiating power last month as the market started to balance out.

“The activity has slowed and in some places, close to a halt,” said Natalie Lewin, a Toronto agent with Re/Max Hallmark Realty Ltd.

“Interest rates are weighing on them and a lot think that the prices are going to drop a lot further and they’re holding out for that. It appears that it’s going towards a buyer’s market, so they’re not anxious to make a decision now.”

In recent weeks, realtors have noticed the pace of sales is not as torrid as it was at the start of the year. Many sellers now garner fewer offers and bidding wars for their home, pushing some to accept a lower price than they may have seen months ago.

The average home price hit $1,212,806 in May, up more than 9 per cent from $1,108,124 during the same month last year.

However, the average home price was still lower than $1,253,567 in April, the third consecutive month where the market experienced a drop.

“Buyers are sitting on the sidelines right now and trying to take stock of what’s really happening,” said Ms. Lewin.

“Their decisions are taking a lot longer than they have in previous years.”

Where earlier this year properties were snatched up as soon as or not long after being listed, Ms. Lewin has seen many sit for weeks and even months.

She listed a property in Brampton for about $749,000 in a neighbourhood where homes were marketed for about $900,000 before. It has sat for two months.

“We’re not getting any action. It’s pretty much like crickets,” she said. “And it’s a great neighbourhood and it shows well.”

She’s seen a similar reaction with a renovated condo in Toronto she listed.

The average price of a detached home in the city of Toronto, which is linked to the 416 area code, rose by 12 per cent since last year to hit more than $1.9-million in May, while semi-detached properties increased by about 8 per cent to reach more than $1.4-million.

Townhouses were up by roughly 10 per cent to total slightly more than $1-million, while condos also saw a 10 per cent increase to an average $793,000.

Detached homes were up about 8 per cent to more than $1.4-million in the 905, an area surrounding Toronto that includes municipalities such as Vaughan, Mississauga and Brampton.

Semi-detached properties and townhouses in the area were up by 14 per cent each to reach more than $1-million and $950,000 respectively.

Condos in the 905 saw 20 per cent growth to an average $722,000.

“There is now a psychological aspect where potential buyers are waiting for a bottom in price. This will likely continue through the summer,” Kevin Crigger, TRREB’s president, predicted in a release.

His board also found the number of homes people had to choose from was little changed from a year ago. May saw 18,679 new listings, down less than 1 per cent from 18,593 during the same month in the year prior.

Looking forward, Mr. Crigger doesn’t feel the changing market will trigger a drop in demand for housing.

“As home buyers adjust to higher borrowing costs, housing demand will be supported by extremely low unemployment, high job vacancies, rising incomes and record immigration.”

Source: The Globe and Mail

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