Government Policy and Higher Interest Rates May Create an Opportunity for Millennial Homebuyers

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September 20, 2017

Photograph by Nancy Xiao

Purchasing a home represents a significant step towards independence for young adults — and also a significant cost. A Genworth study of first-time homebuyers, of which 9 out of 10 were Millennials, found that nearly 40% of respondents in Toronto said that their motivation for purchasing a home was to buy before prices increased further.

In April 2017, the Ontario government announced a 15% transfer tax on home sales to non-resident foreign investors in the Greater Golden Horseshoe area in an attempt to slow the housing bubble and disincentivize property speculation, similar to a measure introduced by the B.C. government in August 2016.

The legislation appears to have worked, as following the announcement, average home prices in the GTA fell 13% peak-to-trough and home sales in Toronto fell 44%. Such an abrupt decline has spooked some potential homebuyers into holding off on the decision, while others are eyeing what they see as a good deal.

A recent TD Economics report found that August saw the first increase in existing home sales in Canada in five months. Existing home sales in Canada rose 1.3%, largely due to a rebound in GTA activity, which increased 13.6%. Average transaction prices in the GTA fell by 0.2% on the month but are still up 14.3% from a year ago.

Another TD Economics report described additional supply and demand factors affecting housing prices.

Following the Bank of Canada’s 25 basis point rate hike in July, there has been a roughly 40 basis point increase in the best 5-year mortgage rate available to home buyers. Rebounding activity and prices will be restrained by rising interest rates, especially in Vancouver and Toronto, where home affordability is most sensitive to interest rates since on average, mortgage payments make up a larger proportion of household income.

On the other hand, there is pent-up demand in most Canadian housing markets due to Millennials who are looking for affordable housing to raise their families. Statistics Canada’s 2016 census data reveals that nearly one in two of young adults aged 20 to 34 in Toronto were living their parents. If prices were to fall in the absence of a change to income, Millennials may prefer to purchase their own property, providing a floor to how low prices can go.

Ultimately, TD Economics expects “the GTA market to continue along its path of a soft landing,” forecasting a 6% contraction in the average home price in Toronto in 2018 and stabilization afterward.

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