RBC releases first time home buyer survey
As Australia wrestles with a housing bubble that dwarfs our own, home buyers in Australia have wisely clued in to the dangers of buying at such inflated prices and have been busy organizing a formal buyer strike campaign. It now appears that first time buyers here in Canada may be adopting a similar, albeit less organized approach.
The 18th annual home ownership study conducted by RBC has revealed some interesting factoids:
“Over half of young Canadians (55 per cent) believe that it makes sense to delay a home purchase until next year, 10 points higher than the national average, and almost half (46 per cent) of younger homeowners admit that their mortgage is using up too much of their income.”
The RBC report doesn’t adequately explain what they mean by ‘too much of their income’. Does that mean they have to sacrifice going on an annual cruise? Does it mean they are finding saving for retirement difficult? I’d be curious to know how they worded this question.
Regardless, these are not an insignificant findings. The data continues to suggest that a significant portion of house price appreciation over the past decade has been due to the loosening of CMHC mortgage standards. To reuse an example I showed in an earlier post, consider that up until just over a decade ago, a $20,000 down payment would get you an $80,000 mortgage, meaning you could buy a house priced at $100,000. The loosening of mortgage standards down to the current 5% minimum (a misnomer given that banks offer up to 7% cash back mortgages meaning you can technically buy with nothing down) has had a huge effect on opening the credit spigots.
Today that same $20,000 would secure a mortgage worth $380,000. Not hard to see how this has had an effect on house prices as credit growth has blasted higher, pulling house prices with it. Note that mortgage credit growth (the red line) went parabolic in the early 2000s.
The major impact of these loosened mortgage lending requirements has been to allow more people into the housing market who would otherwise have to wait until they had saved up an adequate down payment (….I know…..the injustice!).
As a result, we see that mortgage loan approvals and spiked around the same time while the home ownership rate rose significantly.
This entire process was aided by a general downward trend in fixed and variable interest rates, particularly since the turn of the century:
Finally, housing starts have outpaced household formation for the better part of a decade, with household formation running at approximately 175K and housing starts running well over 200K.
This excess inventory has been absorbed primarily because of the expansion in ownership rates, itself owing to loosening mortgage standards and falling interest rates. We’ll explore just what effect this building boom has had on GDP and employment in a later post, but for now, recognize that a significant chunk of economic and job growth has been reliant on this arguably artificial boom in housing demand.
And this brings us back to the original point of this post. First time buyers, the driver of our housing boom, are getting nervous. They recognize that the era ahead of us is fundamentally different from the past decade. Rather than falling interest rates, we will see rising ones. Rather than loosening credit conditions, it seems that the government is determined to rein them in. It seems a given that demand is set to fall, and I believe it will fall hard. What remains to be see is how supply will respond. Certainly home builders have pared back their activity and a lack of resale inventory has kept MLS listings at well below average for most of the past 8 months…..but will it continue?
This is indeed the million dollar question. The attitudes of the young ‘uns and the overall inventory levels are barometers worth watching.