Written by Jim Adair
A new survey of first-time buyers in Canada reveals they are more financially savvy than the general population, well-educated, employed and married or in a common-law relationship. Most of them are millennials (34 or younger) and they share the desire of their parents to own their homes.
The survey, commissioned by mortgage insurer Genworth Canada, “shows that today’s first-time buyers have their eyes wide open, their hands firmly on their pocketbook and are thinking hard before assuming the responsibility of homeownership,” says Stuart Levings, president and CEO of Genworth Canada.
Rising prices have raised concerns about affordability across the country but especially in Vancouver and Toronto, where the average price for a detached home now exceeds $1 million. The high prices and warnings that interest rates could rise and prices could fall are not deterring first-time buyers, who are taking a hard look at the market and their own finances before making the jump into homeownership.
The survey says first-timers are managing their debt carefully, by not taking on additional debt since buying their home. One-third have been able to reduce their mortgage debt by increasing payments or making lump-sum payments.
“With good incomes, solid jobs and a financial partner with whom to share the responsibility of homeownership, most first-time homebuyers generate a positive profile from the perspective of a mortgage insurer,” says Levings.
At a recent conference where the survey was unveiled, Levings said that since the federal government tightened mortgage insurance regulations, the quality of first-time buyer applications has improved. “There has been a big focus on safety to qualify (applicants),” he said. “We have a more responsible, high-quality homebuyer today than what we would have seen in 2007 and 2008.”
Erica Nielsen, a vice-president at RBC, told the conference that “as a lender, we take a lot of time to stress-test our portfolio, looking at interest rate shocks as well as other micro-economic factors. We feel comfortable with the performance of our portfolio.”
However, the survey did show that nine per cent of respondents said they had to draw on their savings to get by, and four per cent said they had to borrow money to get by.
How are most first-timers coming up with their down payment? The survey says they have higher incomes than the general population, with 31 per cent having household incomes of more than $100,000. Almost seven in 10 paid for their down payment from savings or non-registered investments, while 39 per cent made a withdrawal from their RRSP.
A growing number of them — almost 30 per cent — are getting gifts or loans from family members, particularly in the cities where homes cost the most.
Levings said, “The parents have a lot of equity and sometimes that is being drawn out through a line of credit so the kids can get into a home.”
Nielsen said that because interest rates are so low, “many parents are finding the best place to fund (their children’s) down payment may be from their own home, because it’s so cost-effective to borrow.
Levings added that many baby boomers are tapping their home equity for renovations, second homes or investment properties, so it’s not surprising to see some of that money going to help out their children.
A recent report about generation trends in luxury real estate by Sotheby’s International Realty Canada says that in the luxury market, “Despite above-average incomes… 85 to 95 per cent of luxury buyers are reliant on mortgages. The vast majority also receive outside financial assistance towards down payments, primarily from baby boomer parents.” The report said that only a small number of Generation X (born from 1965 to 1979) buyers receive gifts or loans on their initial down payment.
David MacDonald of Environics Research Group, which conducted the survey, said that although the millennials are educated and used to researching financial and real estate matters on the Internet, they still want to consult professionals when buying a home. Asked where they found “important sources of information”, the first-timers most often cited mortgage professionals, family/friends, bank/credit union representatives and real estate agents.
Phil Soper, president and CEO of Royal LePage Real Estate Services and another panel participant, was asked if for-sale-by-owner and discount real estate commission companies are gaining market share.
“Naw, they don’t have a chance,” he joked. “If you look at the percentage of people (buying a home) who are not using a licensed professional Realtor, it hasn’t changed. It’s about 10 per cent outside of Quebec and 50 per cent in Quebec” where private sales are a well-established tradition. That number hasn’t grown, he said.
“Millennials want to work with professionals,” said MacDonald. He said when it comes to personal finances, “when you start to see six digits in a row, you want to make sure you are doing the right thing so that means working with a financial advisor or a mortgage professional or a real estate agent to help you.”
He says professionals working with millennials to buy a home should “open their eyes to the tools (that are available to them, such as mortgage calculators on the Internet) and show them the step-by-step process they need to go through to make a decision. Let them know it requires a little bit of work right now but it will all be worth it in the end.”