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Toronto Loft Conversions

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Modern Toronto Lofts

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Unique Toronto Homes

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Condos in Toronto

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Toronto Real Estate

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Tag Archives: buying a house

Can this young Toronto family really afford a house?

Rob Carrick – The Globe and Mail

I really want to tell this couple it’s okay to buy a house.

Let’s call them Grace and Jim, both 35 years old. They live at Jim’s parents’ place in Toronto with two kids, aged 2 and five months, and they have differing views on buying a home. Jim, a self-employed musician who describes himself as being conservative with money, is nervous about taking on the financial burden and sees houses as overvalued. “These are mainly my issues, not my wife’s,” he said. “I am well aware of that.”

Comment: The problem is, value is entirely subjective. Regardless of your opinion on value, prices are what they are and you have to pay the going rate if you want a house.

Grace, who stays home with the kids while doing a little freelance writing on the side, is ready to buy. “We just keep saving and saving and putting it off,” she said. “And now, here we are with a sizable down payment, and we’re still hemming and hawing. We’ve got to bite the bullet.”

Buy a Toronto house
I’ve written a lot of contrarian columns on buying and owning homes in the past couple of years, but I’m not anti-ownership. If you can truly afford a house and have realistic expectations of where the market is headed, then go for it.

Comment: Sounds like it. And what are realistic expectations of where the market is headed? Seeing as how it has risen for about 18 years now, and has risen for about 45 of the past 50 years, there is little reason to expect much change. Demand continues to outstrip supply and mortgage rates are not rising any time soon. Lots of people continue to move to the GTA every year and are unlikely to stop. So a reasonable expectation is for prices to continue to rise for the foreseeable future. Don’t listen to the “experts”, look at the facts and make up your own mind.

Based on what they told me, Grace and Jim can truly afford to buy. What keeps me from giving them an unreserved thumbs up is their insistence on living in Toronto, rather than the less expensive suburbs outside the city. “All of our family is in Toronto, and we were both born and raised here,” Grace said. “My husband travels quite a bit, so with the two young kids we want to say close to my in-laws.”

Comment: And this is why people complain. They say housing is unaffordable – but it isn’t if you get farther from the core. Go to Brampton, or Newmarket or Ajax and you can get something quite nice for 1/3rd of what it costs in the 416. But if you want to live in Leaside or near Trinity-Bellwoods, then you are going to need a big bankroll.

In terms of a down payment, this couple is golden. They pay $450 in monthly rent to Jim’s parents, but save enough to have $120,000 ready for a home purchase. Their income is a little more problematic because of Jim’s non-traditional job. However, Grace plugged their household income into my Real Life Ratio spreadsheet and came away encouraged.

The Real Life Ratio is designed to show prospective or current homeowners whether they can balance the financial demands of home ownership with saving for retirement and household costs such as daycare and car loans. Grace got a score of 71.6, which means a home is affordable based on her and Jim’s income and frugal, debt-free lifestyle.

Comment: But what price did she plug in for a house?

The complication: She used their preferred maximum mortgage payment of $1,700 per month, which means the couple’s borrowing ceiling is roughly $350,000 (assuming a 3% five-year mortgage). Even with a $120,000 down payment, that doesn’t buy much house in Toronto.

Comment: Ah, there’s the rub. That is not even close to being reasonable for Toronto. That barely buys a condo anymore. And that doesn’t buy a house anywhere in the 416.

Grace says the couple is willing to live in a townhouse, or buy a home with a basement apartment that can be rented out. In any case, a quick run through the website did uncover a few townhouses in the city in the range of $470,000 or so.

Comment: Which is 1/3rd more than their stated budget. And that was the cheapest you could find? Doesn’t surprise me at all. But move to Durham Region and you can get a detached house for $100,000 less than that.

Jim, the housing skeptic, worries that prices are too high right now. “My first degree is economics and, looking at this market, I’m thinking, whoa, it’s way overvalued.” And yet, he concedes that waiting for prices to fall hasn’t worked out. “We’ve been doing that for years.”

Comment: Yes, prices are too high. But they are only going to get higher. And they have fallen into the same trap so many others have. Prices have not fallen, they have done the opposite. These days, we are looking at about 10% annual appreciation for the average property – more for freehold homes. Had they bought 3-4 years ago, their $350,000 would have gone a LOT further than it will today. Probably 20-30% further. As with so many others, the waiting game hurt them badly, they probably priced themselves out of the market completely. And waiting more will only make it worse. They will be lucky to get a 1-bedroom condo – for themselves and 2 kids.

It would be unfortunate if Grace and Jim bought just before a price decline, but they shouldn’t worry if they can stay put for 10 to 12 years at least. That would be long enough for the market to recover from any setback in the next few years.

Comment: But there won’t be a price decline, so it is a completely moot point.

Grace and Jim say they’re willing to stay in the house they buy, but will they? I recently asked the people in my Facebook personal finance community how old they are, how long they’ve lived in their house and how much longer they plan to stay. The surprise was how many younger buyers with just a few years in their homes had near– to medium-term plans to move.

Comment: Because first-time buyers buy what they can afford, to get into the market. Then they aim to move up later. Most people don’t buy their “forever” home the first time.

So, are Grace and Jim good to go? Provided they buy on a 10-year plan and make any needed home-buying compromises on location rather than price, the answer is yes. What’s more, they should get moving.

For one thing, delaying a home purchase for years could compromise their ability to retire with ample savings and a paid-off house. They also need to act soon if they want to lock in today’s low mortgage rates. If they wait, they might learn the hard way that a modest rise in mortgage rates has more of an impact on affordability than a comparable fall in home prices.

Comment: But there won’t be a fall in prices. Prices will rise, and mortgage rates will rise. In the absolute worst case scenario, prices stay the same and mortgage rates rise. But likely prices rise and rates stay the same or rise. The best time to tomorrow is yesterday, always is.

Grace and Jim, home buyers through history can tell you that money worries and a house are a package deal. But I think you can handle it.

Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.