No generation has had a tougher time getting into the housing market than Generation Y. Indeed, the deck is stacked against Millennials, many of whom are burdened with crushing student debt loads, grim job prospects, and limited wage growth in a stagnant economy. Furthermore, the federal government cracked down on 40-and-35-year amortization mortgages, mostly to avoid a U.S. style housing collapse, and there’s talk of raising the minimum down payment from 5 to 10 percent.

Yet housing prices have continued to surge over the last decade, particularly in appealing centres such as Vancouver and Toronto, fuelled by record low interest rates and booming condo sales.

Related: Home Buyers Regret

But first time homebuyers still represent a large portion of the housing activity in Canada. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), an estimated 210,000 of the 425,000 homes purchased in 2014 were from first-time buyers.

How First Time Home Buyers Are Getting Into The Housing Market

Down-payments for First Time Home Buyers

These property virgins aren’t just putting down the bare minimum in order to get into the market. CAAMP estimates that, on average, first-time buyers make down payments equal to 21 percent of the price of their homes. That’s no small chunk of change. With average home prices across Canada surpassing $450,000 this summer, a 21 percent down payment represents nearly $95,000.

So where does the money come from? Here’s what the CAAMP survey found:

Personal savings (40 percent) – First time home buyers are using their own savings to get into the housing market – with a reported 40 percent of total down payments coming from the personal savings of applicants and their co-applicants.

Tax-free savings accounts represent a flexible way for first-time buyers to save up for a down payment. With annual contribution limits rising to $10,000 this year, couples have the potential to save up to $20,000 per year inside their TFSAs and invest the funds in a variety of ways – from high interest savings accounts and GICs, to stocks, mutual funds, and ETFs.

Gifts and loans from family (17 percent) – Funds procured from the bank of mom and dad are on the rise. Gifts and loans from family represent 17 percent of down payment funding for first-time buyers, which is up from 13 percent five years ago.

While not as significant a source as some might speculate, gifts and loans from parents and other family members are becoming more common in expensive markets like Toronto and Vancouver.

RRSPs and Home Buyers’ Plan (12 percent) – Withdrawals from RRSPs using the Home Buyers’ Plan (HBP) have declined in recent years, down from 16 percent between 1995 and 2004.

The HBP allows first time home buyers to withdraw up to $25,000 from their RRSP to put toward a down payment on a home. But with declining savings rates, a relatively low maximum withdrawal amount (when compared to the amount needed to qualify for a home today) and the introduction of the TFSA, the HBP may have become redundant in today’s market.

Related: My biggest home buying regret

You have up to 15 years to repay your HBP loan, starting in the second year after the year in which you withdrew the funds. But research from Canada Revenue Agency suggests that 35 percent of HBP withdrawals are not repaid each year.

Final thoughts

Although it’s become increasingly more difficult to buy a home today, it’s clear that first time homebuyers are the engine that fuels the housing market – representing nearly half of all home buying activity in Canada.

The challenge comes when first-time buyers can’t save fast enough to keep up with a hot real estate market. That type of pressure can lead to emotional decisions, such as buying before you’re financial ready, or borrowing the funds through alternative lending or cash-back mortgage incentives, all in order to avoid getting priced out of the market forever.

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6 Comments

  1. MAX on October 12, 2015 at 8:36 am

    “Yet housing prices have continued to surge over the last decade, particularly in appealing centres such as Vancouver and Toronto, fuelled by record low interest rates and booming condo sales.” More like fuelled by record amounts of laundered money, principally from China……

  2. MG on October 13, 2015 at 11:53 am

    Hi there,
    I am surprised that you did not mention CMHC or other similar providers that allow buyers to purchase a home with only 5% down.

    MG

  3. Chris @ Rags to Reasonable on October 13, 2015 at 8:07 pm

    Hey Robb,

    I’m surprised that the majority are putting more than 20% down, that definitely doesn’t seem to be the case over here in Toronto… but the rules get all crazy over here anyway.

    I think what a lot of first time buyers forget is that saving the downpayment is just a part of the whole cost, and if they’re stretching to reach that savings goal … maybe they should reconsider.

    It is indeed a tough challenge for we Millennials when it comes to real estate, luckily there are simpler ways to build wealth with a lower barrier for entry.

    Thanks for the piece!

    Chris

  4. Pira on October 13, 2015 at 8:26 pm

    It really seems like millennials are rushing to get into the market when it really doesn’t seem like the best investment at the moment. They scramble to do the 20% down (I suspect more of it comes from parental gifts than noted in the post) and then struggle to meet the unanticipated costs of legal fees, etc. I say why rush? Invest your money and wait for prices to settle to a more reasonable level, which they inevitably will.

  5. Potato on October 15, 2015 at 7:38 pm

    “These property virgins aren’t just putting down the bare minimum in order to get into the market. CAAMP estimates that, on average, first-time buyers make down payments equal to 21 percent of the price of their homes.”

    I read that and had to dig deeper because it doesn’t mesh with my pre-existing notion of FTB down payments.

    Of the people who answered their survey, the average down payment was 21%. But Genworth has the median down payment at just 12%. CAAMP’s numbers also put the median somewhere in the low 10-20% range, with 36% putting down less than 10% and 62% putting down less than 20%. (Genworth’s average down payment figure is at 16%)

    With such a disagreement between the median and the mean there, we know that there’s some kind of skew to the data.

    And the surprise to end all surprises is that it’s Vancouver and Toronto that’s skewing the average up, with gifted down payments 40% above the average. However, the average house values of FTBs who answered the survey was well below the actual average price in the regions. It raises the question as to whether that’s because, durr Potato, FTBs are the bottom end of the market, or because the survey was not representative (I’ve only spot-checked Calgary and Montreal, but the FTB prices there were a fair bit closer to the overall market average prices, but that could just be because Toronto and Vancouver just have a wider spectrum to begin with).

    And of course gifted down payments can explain why mortgage debt growth is still happening so quickly: the down payment we see is high, but it may just be built on someone else’s debt (e.g. the parents doing an equity take-out).

  6. Patricia on October 21, 2015 at 12:03 pm

    Really good read! Here’s a good article on how to become debt free: https://champion.ca/2015/06/15/debt-free/

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