Millennial Money is a weekly submission-based series providing financial advice to millennials. Read the whole series here.
At 30, after 12 years of dating, Vanessa and her boyfriend are ready to take their relationship to the next level: they want to buy a house.
But like many other millennials and young people stuck in the hot Toronto-area housing market, the two are wondering if it’s even feasible.
“We’ve saved a total of about $100,000 and will have help from our parents,” Vanessa said.
Still, they know they have to be realistic. After bouncing back and forth between renting different downtown one-bedroom condos, paying more and more each year, they know they need to get out of town to buy a home.
“Although we will miss the city, we want to start a family,” shared Vanessa. “After looking at all of these properties, my friend and I realize we need to look a little further out.”
The couple have been working with a real estate agent and have viewed a few viewings but have not finalized anything.
“What else do we need to know about mortgage rates and other homeownership costs?” asked Vanessa.
On a typical day, Vanessa, who earns $80,000 a year in a marketing position, works from home five days a week. Your friend does too and earns a similar salary. At the weekend they meet up with friends for a drink, hang out in the park or invite people over.
“Since we love to cook and experiment, I make almost all meals at home,” she says.
Their love of entertainment is another reason they want a home.
“It’s become far too little space for both of us to work from home or entertain,” she explained. “(But) whether that’s St. Catharines or Hamilton, everything seems priceless.”
We asked Vanessa to share her expenses for a week to get a better idea of her spending.
The expert: Jason Heath, Managing Director at Objective Financial Partners Inc. on Vanessa’s situation.
Vanessa and her boyfriend are good savers but still frustrated with their prospects of owning their own home. Her $100,000 down payment would have been nearly 20 percent of a single-family home purchase 10 years ago in April 2012, when the reference price was $528,100. Now, despite a pullback from March’s record high, the April 2022 reference price was about three times that – $1,578,700.
In behavioral finance, there is a concept called recency bias. It is the tendency to place too much emphasis on current events when making financial decisions. For example, single-family home prices in Toronto have risen 11.57 percent annually over the past decade. Fear of missing out leads some people to believe it will stay that way. If this is the case, a single family home would cost $4,719,357 in April 2032.
At $2,000 a month, Vanessa and her boyfriend have a reasonable monthly rent for a condo in the heart of the city. You save at a good pace. When interest rates rise, the housing market will inevitably face headwinds, regardless of whether prices continue to fall or at least stabilize. The potential to move to a place like St. Catharines or Hamilton where they can get more houses for their dollar is there provided they work from home.
However, their virtually non-existent transportation costs could change if they live in a place where they can’t walk or bike everywhere like they do now. They also love hosting and cooking for their friends in Toronto and may have to give that up or make new friends in a new city or community. So there are financial and non-financial costs to leaving the city you love.
If I were you, I could think about how interest rate hikes would affect house prices. If they want to increase their savings, they might consider selling their car. They hardly use it and spend about $30 a month on gas. It can be paid for, but there’s a cost to having it in their lot — depreciation, insurance, and an opportunity cost of not adding the car proceeds to their savings. Used cars are also in demand at the moment. The Canadian Black Book reports that used car prices have risen nearly 50 percent over the past year as dealers struggle to stock new cars.
Additionally, the recently announced tax-free First Home Savings Account is designed to help Vanessa and her boyfriend accelerate their savings with tax-deductible FHSA contributions that they can withdraw tax-free toward home purchases.
In the meantime, I would encourage them to have an open conversation with their parents about what kind of help they can expect from them, if they haven’t already. You should also get a feel for the potential costs of buying and owning a home, including property transfer tax, legal fees, home furnishings, property taxes, insurance and maintenance costs. The monthly cost of owning your home will be much higher than your rent, although some of those costs include the principal of your mortgage.
Toronto has long been a seller’s market, but for renters like her with down payments, the tide could turn.
Results: She spent less. Week 1 spend: $1,353 Week 2 spend: $376
How she thinks she did it: Before this exercise, Vanessa thought she was pretty frugal with her money.
“I thought I was pretty balanced, but I’m a little surprised at how much food and drink actually add up,” she said.
That has prompted her to consider shopping at other grocery stores and making more similar meals in a week’s time.
“Again, we love to cook, so we love to change it up, but that ends up being very expensive,” she said.
Take away“When I read 10 years ago that $100,000 saved was 20 percent, it just haunted me,” Vanessa said.
While realizing that times have changed, the advice and shock makes her reevaluate the rush to buy a home.
“We’re always told the market is going straight up,” she said, adding that it seemed like a rush after saving six figures. “But really, so many things could happen as the advisor said.”
The pair have already been scouting places in the St Catharines and Hamilton area but are now asking their agent for a little break.
“The apartment hunt is really demoralizing,” said Vanessa. “Just when you think you can make an offer, it’s so quickly snatched up.”
So they arranged a meeting with their parents to discuss exactly how much they are willing to help financially and what kind of repayment is expected. Vanessa added that the call will also include any other additional costs, from utilities to property taxes.
Finally, they also want to look into the mentioned FHSA account Heath.
“I figured after saving so much it would be realistic to start looking. We have to go back to the drawing board instead.”
Are you a millennial living in Toronto or the GTA and need help saving your money? Join #MillennialMoney and email [email protected]
Digital design by McKenna Deighton.
Evelyn Kwong is a Toronto-based journalist and freelance star’s business contributor. Follow her on Twitter: @evystadium