Saskatoon Mortgage Blog

First-time Home buyers are the housing market’s pinata

November 15, 2017 | Posted by: Lisa Helfrick

In today's hot housing market, first time buyers can't

afford to get in

Rob Carrick The Globe and Mail, Oct. 06 2014

First-time buyers are the housing market’s pinata.

People buying a first home are essential to the real estate market. But when the federal

government periodically tries to cool home sales, its go-to strategy is make it tougher for firsttimers.

We’ve seen that in the rollback of maximum amortizations to 25 years from as many as

40 and in tighter requirements to qualify for a mortgage.

Housing consultant Steve Pomeroy says the focus on first-time buyers is both unfair and

ineffective in addressing a major contributor to rising home prices. “First-time buyers are being

marginalized when they’re not the ones driving house prices,” Mr. Pomeroy said. “It’s the resale

buyer that is driving prices.”

Our housing policies as a country have been designed to aggressively promote home ownership,

yet they’ve created a market where young people can’t afford to buy in. Mr. Pomeroy’s report

gives us a little more insight on why this is.

Even with ultra-low interest rates, first-timers live in a world of precarious affordability. Every

month prices rise, and so do the down payments they have to save and the mortgage payments

they’ll make when they buy. Move-up buyers love rising prices because they mean more equity

help finance the purchase of a bigger home.

Mr. Pomeroy created an example of a family with a modest annual income in 2001 of $47,000,

enough to purchase the average-priced Canadian home at $172,000. The house is bought in his

example with a 5-per-cent down payment, which means a mortgage of $163,000 and monthly

payments of $1,175 based on prevailing rates back then of 7.3 per cent.

At the national average rate of price increase over 10 years, the home would have grown in value

by 95 per cent as of 2011. Add in repaid principal of about $34,000 and you have equity of

$207,404 to use for the purchase of a larger home (assumes no extra payments and the same

mortgage terms for the whole period). With rates in 2011 down to 4.55 per cent, Mr. Pomeroy

figures a $420,000 home is easily doable for this family.

That’s based on their income in 2001. Using average income gains over the decade ahead, Mr.

Pomeroy estimated the family would qualify for a mortgage of $275,000 and a maximum house

price of $480,000. Flash ahead to 2014, and he projects this family would be able to buy a house

costing $684,000 as a result of further increases in house prices and income that now comes in at

$65,800.

In a column last summer, I calculated that a first-time buying family would need income of

$89,363 to qualify to buy the average-priced $416,584 resale home with a 5-per-cent down

payment. Mr. Pomeroy’s example has a family with a much smaller income moving up to

something quite a bit more expensive.

There’s a name for the psychology of rising house prices – they call it the wealth effect. We feel

rich when our houses rise steadily in price, and so we act that way. It’s well documented how

people have used home equity lines of credit (HELOC) to capitalize on rising home values. A

Bank of Canada report of a few years back called HELOCs a main driver of rising household

debt.

But move-up buying isn’t as well understood or discussed, said Mr. Pomeroy, who in addition to

running Focus Consulting is also a research associate at the Carleton University Centre for Urban

Research and Education. Part of the problem is that there’s not a lot of data showing the

breakdown between move-up and first-time buyers. The closest Mr. Pomeroy has come is a

survey by the Canadian Association of Accredited Mortgage Professionals that indicates firsttimers

accounted for about 55 per cent of purchases in 2013.

There’s also the question of what can be done to inhibit move-up buyers in particular. Firsttimers

are an easy mark because there are so many ways to adjust the rules on qualifying for a

mortgage. The precedent in our mortgage market is that once you’ve qualified for a mortgage

loan, you can renew it without any new hurdles being introduced.

Interest rate increases would cool the entire housing market, but first-time buyers would be hit

the hardest. For a first-timer with a 5-per-cent down payment, the average-price resale house in

Canada would today require borrowing of more than $390,000 including mortgage insurance

premiums. The more you borrow, the more vulnerable you are to rising rates.

It may be that the best check on move-up buyers will be weak demand for their homes from firsttimers.

“We are really constraining the ability of young kids to get into the market,” Mr.

Pomeroy said.

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/housing-market-beats-up-on-first-time-buyers/article20951842/#dashboard/follows/

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