For Canadian GTA and GVA residents, the American Dream is dead

It is Generation Squeeze alright

Expensive Detached Homes

The title is from the closing sentence of article Your Kids Will Never Own A Single-Detached Home by Ben Myers, SVP of Fortress Developments. I would have presumed that since he works for a condo developer, he wants to use the article to nudge you to buy a condo. However, despite its scare mongering title, it actually comes across as very insightful:

I consider myself lucky to have purchased a condominium apartment 10 years ago in Toronto, catching the upward price wave before it became a tsunami. Like many of my peers looking to start a family, I bought an entry-level condo townhouse after three years of small-space loft living.

On paper, my home has appreciated by $200,000 since I bought it seven years ago. I should be ecstatic, I should be jumping for joy at my financial windfall. However, strangely, I have not done any joyful jumping whatsoever; like many people in my situation I am stuck on the property ladder.

Despite the substantial increase in the value of my townhouse, single-detached homes in my neighbourhood have increased by $500,000 during the same period!

My kids want a back yard (and so does my dog), but I don’t want to double or triple my mortgage for a piece of grass and a couple extra feet between me and my neighbours.

Over leveraged Home owners

Below is from PWC’s Emerging Trend in Real Estate 2017 report #ETRE17

The prices are so out of reach for average household that despite making a hefty 25% down payment and a 25 year amortization, you still cannot afford to own a home at average price as most of your income will go towards making mortgage payments.

Ben is being conservative and cautious here as he is not doubling or tripling his mortgage. But are other GTA and GVA residents as conservative? Below is from DBRS report that I have reproduced in my earlier posts too

One indicator of the stress on home buyers from rising house prices is the high level and continued increases in the proportion of all insured mortgages that have loan-to-income ratios (LTIs) above 450%. The proportion of these high LTIs has been rising across all metro areas in Canada, particularly in the GTA and GVA (see Exhibit 3)

GTA and GVA residents are going deeper and deeper into debt to get on the property ladder to buy that coveted single family detached home.

Expensive Condos

So if you can’t buy a single family detached house, you can buy a condo in a high rise. But condos aren’t cheap either and getting more expensive by the day

According to President of Bild,

“The recent increase in high-rise prices can be attributed to the rise in average suite size, combined with a growing price per square foot,” Tuckey said. “This year we have seen the introduction of larger suites aimed at purchasers who have been priced out of the low-rise market.”

It is not only that condos are getting expensive to buy, occupying the newer construction with amenities such as gym, sauna, roof top terraces acts as a double whammy because of the recurring maintenance charges which may make sense for a young professional or a couple but for someone starting a family or becomes un-affordable. After buying a condo, paying up to $500 per month in maintenance changes is not my idea of affordable.

Questionable Marketing

Then there are condo builders trying to come up with creative solutions to get the people on property ladder. Though Ben disagrees with me on this but I find the following dangerous. If the person can’t even afford the 5% down payment of a condo, why get him enticed. When the time comes he may not even qualify for a mortgage or a slight change in interest rate may cause his to default on his payment.

New development in Victoria offers creative down payment structure

Tomaszewski wants to make home ownership possible for people who are finding it hard to reach that down payment threshold.

“I remember what it was like,” said Tomaszewski. “I had a good job and a family and I wanted to buy my first house, but there was no way I could get together a down payment for the longest time. I want to help people in that situation.”

His solution is a competitive pre-sale purchase incentive that will allow buyers to enter the market with no down payment.

Potential buyers will be able to secure a unit with no money down by making interest free monthly payments now which will add up to five per cent of the value of their selected unit. When the project is completed at about Christmas of 2018, buyers will be able to apply those funds to the purchase price and enter into a regular mortgage situation on their unit.

The report goes on to state that

It’s an opportunity that caught the attention of Jeremy Evans. He’s been looking for a place of his own for just over a year and, despite being employed and saving some money by presently living with his parents, the challenge of raising the lump sum down payment required for a home purchase has been daunting.

And finally

The four storey building will have a central courtyard, complete with its own orchard. Each unit will also be assigned a rooftop garden space where wildflowers, herbs or vegetables will be grown by virtue of a specialized water system for irrigation.

To complete the picture, Tomaszewski has included a rooftop sauna and an apiary to house bees to help pollinate the orchard and gardens.

You have got to be effing kidding me. The guy can’t afford the 5% down payment and he is going to be able to afford the maintenance expenses of a sauna, an apiary and specialized water system for irrigation.

But most of my rage is reserved for this one (which I have already shared in my earlier post) with thanks to @stephaniefusco on twitter

Scare mongering people into securing the kid’s real estate dreams? I can’t even afford a condo for myself much less think about buying a condo for my kid. I wonder who is going to pay the maintenance charges for that condo till my 7 year old grows old enough to realize this dream. I also wondered what “secret strategies” were revealed in that seminar presented by a condo builder, a mortgage advisor, a real estate lawyer and…. wait for it….. a pre-construction condo adviser (is that even a thing?)

Squeezing the Middle Class

OECD came out with its economic survey today stating that increased house prices in Canada are squeezing the middle class

Low interest rates have encouraged further increases in household credit, with household debt continuing to edge up from already high levels. Canadian house prices have risen sharply, especially in Vancouver and Toronto, and housing investment is unusually high as a share of GDP, posing vulnerabilities and squeezing middle-class families in these high-priced markets. In response to these developments, the authorities have deployed some targeted macro-prudential measures, but further regionally focused measures should be considered.

Politicians talking the talk, but not walking it

And though the politicians do talk about affordability, their interest really isn’t in it. Swayed by the likes of Richard Florida of the infamous Rise of Creative Class and their own self interest, their actions don’t walk their talk. As summarized in a Harvard paper

Law and policy at multiple levels of government play a sizable role in all matters of housing affordability. The tax code, for one, is fundamental to enabling and constraining housing initiatives. Most cities rely heavily, if not exclusively, on revenues from property taxes, but many do not have the power to set property tax rates. That power typically rests with the state. Local politicians seeking to increase revenue streams to fund social services have but one practical means at their disposal: Increase property values to drive up tax revenues (Goldsmith & Blakely 2010, Nelles 2013). As Frug & Barron (2008) have argued convincingly, under these legal constraints gentrification becomes necessary for local politicians of any persuasion. Social scientists often present gentrification as something that happens to this or that transitioning neighborhood and explain it by referencing economic and sociological dynamics. But a more expansive approach would analyze how tax policies incentivize, even force, local politicians to court gentrification on a much larger scale.

So far, have yet to see any tax policy etc from Canadian government that is effective or even goes some way towards bringing affordable housing to Canadians.

Not a real estate bubble

I won’t go as far as to call it a real estate bubble because I have seen people calling it a bubble for last 6 to 7 years and frankly speaking it can be very exhausting calling for the bubble to burst at every news item showing rising house prices or increased indebtedness. As the OECD chart above shows, that increase in indebtedness is tapering off. However, I do agree that it is a affordability crisis.

Stagnant Income

But there are two elements of affordability. One is the house price. Other is your income. Even if the house price is increasing, if income of Canadians is increasing at a higher rate, there is still a chance that one day it’ll become affordable. Unfortunately, there isn’t any positive news on that front either. CIBC released a research report today (I recommend reading the full report for the caveats, assumptions and methodology but below I summarize a few points)

Is the quality of employment in Canada in decline? We think so. By looking at the distribution of part-time vs. full-time jobs; self-employment vs. paid-employment; and the compensation of full-time paid employment jobs in more than 100 industry groups, we observe a slow but steady deterioration.

As illustrated in Chart 5, the declining share of young Canadians in the labour market can bias our direct measure upward. At the same time, the rising share of older Canadians that are less engaged in the labour market can bias the measure downward. Chart 9 overcomes that problem by focusing on the age group between 25 to 54. The story is the same: The share of lower-paying jobs has been on the rise.

Generation Squeeze

House prices are increasing and low wage paying jobs are on the increase. Hence, the current and the next generation in the words of OECD, is getting squeezed. I really like the term Generation Squeeze and this is how the advocacy group describes the situation

As younger Canadians finish school, begin careers, look for homes and start families, we are squeezed by stagnant incomes, high costs, less time and mounting debts (including a deteriorating environment) — even though our economy produces more wealth than ever before. While governments use this wealth to adapt policy for others, including our aging population, they continue down a path that leaves less and less for younger generations.


Yep. We are Generation Squeeze alright.

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