In a city like Toronto, where housing prices far surpass national averages, homeownership can seem like a lofty ideal for some and wishful thinking for others, especially as the cost of housing outpaces income and income growth. In fact, Toronto has just been named the 5th most "severely unaffordable" city in the world, in a 2021 Report By The Urbane Reform Institute.
The pandemic has pushed average sale prices up across the country, raising the height of the hurdle for those trying to jump into the housing market. In a story entitled, “The Pandemic Was Bullish For Canadian Real Estate, Confirms National Stats Agency”, Stats Canada confirmed a fact that monthly updates from organizations like TRREB and CREA had already indicated: national real estate values rose substantially last year, more so than forecasted.
While Toronto usually leads the pack when it comes to spiking home values across all home types, the city experienced an anomalous situation in the latter months of last year; fear of COVID-19 transmission in high-density buildings (in addition to travel restrictions and changes to short-term rental rules) had a severely negative impact on condo values, while, at the same time, freehold home values continued their upward trajectory. However, as we work our way through this pandemic, and with the vaccine on the horizon, it is widely expected that momentum will gather again in the condominium market, creating upward pressure on prices as 2021 continues.
Another major challenge for would-be homeowners is the ability to amass a down payment for a home, especially in a city like Toronto where the cost of living is high. It can take a significant amount of time to put savings aside to reach this goal. New reports show that it is taking households the longest time in history to save the required amount.
In Toronto specifically, it is shocking to see just how long the average household would need to save just to get into the market. According to the Housing Affordability Monitor from National Bank, referred to in a recent Better Dwelling article - "Canadian Households Now Need Up To 34 Years Of Savings For A Down Payment" - Toronto home buyers saving to purchase a condo need to save for 4.25 years. Those hoping to purchase a home other than a condo will need to save for 24 years (assuming a rate of return on their investment of 10%).
The reason for this is the disparity between growth in real estate prices and growth of incomes. In Toronto in 2020, income grew at a rate of 1.3%, compared to price growth of non-condo homes of 5.5%. Condo prices grew more attainably at 1.2%. These savings projections are based on an average household income of $178,499.
This article from Now Toronto, "A Down Payment On A Toronto House Should Take 24 Years To Accumulate", breaks down the National Bank report to provide further context on the Toronto market.
A Creative Solution For Hopeful Homeowners
From challenging markets often emerge creative solutions, giving prospective homeowners options. One such option available right now is co-equity ownership, which essentially is a hybrid model of homeownership and renting.
Basically, an owner-resident places an equity investment with a co-equity company. The company sells initial equity ownership to the owner-resident - which is typically a fraction of the amount of a traditional down payment for a mortgage - and gives them the opportunity to pay into their equity share over time. As the value of the suite increases, so would the return on the equity share.
One such company is Key, which holds a number of suites in three coveted buildings in desirable downtown neighbourhoods.
With Key, owner-residents are offered an equity share or 2.5 percent, which for most of the suites that they own, will translate into about $15,000. What’s more, is that first-time homeowners are able to use funds in their RRSP to utilize for this payment.
The more equity you build up in your home, the less it costs you per month to live in your suite. Initially, a small portion of your monthly payment goes towards equity building, but you are free to increase that as you wish over time. There is an option to make lump sum payments or to increase monthly contributions if that suits budgeting.
There is a lot of upsides here. Prospective homebuyers can be building up equity in real-time, rather than renting and trying to save up for a down payment over time.
Another benefit is the freedom to move when it suits you (as long as you give two month’s notice). You aren’t locked into a mortgage here, and you wouldn’t have to manage closing and other costs that you would have to assume if you were selling your home.
Key is also an option for those trying to gain entry to the homeownership market, but are having trouble qualifying for a mortgage because they don’t meet certain traditional lending criteria, like they are self-employed, new to the country, or don’t have enough amassed for a down payment.
Check out Key’s calculator to see how the home equity works under their model.
In a world where nothing is certain, and economies fluctuate daily, security and 'Home' are even more important!!
~ Posted by Steven Fudge, the purveyor of houseporn.ca and proprietor of Urbaneer.com, a division of Bosley Real Estate Ltd., Brokerage.