Mary and John (not their real names) began their hunt for a house in Toronto nearly 2 years ago with a budget of $700,000. Like many other Buyers, they were intimidated by the speed and ferocity of the market. They witnessed packed open houses, bidding wars and bully offers and like many others, clung to the hope that maybe prices would fall and they should wait to buy. They went in and out of the house search, paying rent and watching their mortgage pre-approvals expire.
Fast Forward 2 Years:
Mary and John can’t afford to buy a house in Toronto anymore (at least not in one of the neighbourhoods they want to live in). Prices for detached houses in their target neighbourhoods have increased 21% while the size of their downpayment has only increased by $30,000 or 4%. Their incomes have increased too, but not nearly enough to offset the increase in house prices. Their new $750,000 budget buys a LOT less than it did 2 years ago.
Here’s a graph illustrating prices for detached houses in the C1 District (Yonge street to roughly Dufferin, south of Bloor):
The story doesn’t get much better if they adjust their expectations: prices for semi-detached houses went up 15% during that time:
Mary and John are now contemplating their options:
1. Expand their neighbourhood horizons – With their budget, there are still house options for them in good neighbourhoods. But those neighbourhoods are further from downtown (thus increasing their commute time) and are still in transition. The services and lifestyle Mary and John were hoping to find outside their new doors are transitioning too, so everything is a little further and not quite as developed.
2. Buy a condo or townhouse – There are lots of nice options for them in the $750K budget range. Mary and John plan to have a family and neither of them envisioned raising kids in a condo. They had dreams of a nice backyard, a treehouse and a playroom in the basement but are starting to realize that may not happen. Buying a condo or townhouse would get them into the real estate market so they could start building equity and pay their own mortgage vs someone else’s. The last 6-9 months have seen an increase in activity in the $600K+ condo market as more and more Buyers accept that they can’t afford to buy the house they want.
3. Borrow money from John’s parents to increase their downpayment and increase their budget. – This is tempting on many fronts, but as they say, banks don’t charge guilt and parents do.
4. Increase their budget by deciding to pay higher monthly carrying costs. – Mary and John actually qualify for a higher mortgage, but don’t love the trade-offs they’d have to make to pay the mortgage. They’ve always loved travelling and dining in trendy restaurants and are hesitant to give that up.
5. Wait and Pray – This strategy has hurt them a lot in the past 2 years. While many “experts” have been predicting declining prices for years, there isn’t much evidence to support that right now (at least not in Toronto’s central house sector). If they wait too long, they’re afraid they’ll get priced out of the condo market too.
What should Mary and John do?
There is no right answer.
Personally, I’ve always bought in neighbourhoods that weren’t ‘quite there’ yet. It’s more affordable and I enjoy the higher-than-average returns that come (over time) with living in a transitioning neighbourhood. I also love watching a community grow up around me.
I also lived in a townhouse for 8 years and absolutely loved the low-maintenance lifestyle that came with that.
I currently live in a house that was outside of my original budget and target neighbourhood. We fell in love with the house and the neighbourhood and we’re confident that it will be a good long-term investment. We may have to forego that spontaneous trip to Mexico to make it happen comfortably, but we’re OK with that.
We help people like Mary and John work through their personal situations all the time. Sometimes the right thing is to buy – and sometimes it’s not. If you’d like to talk about your own situation, feel free to get in touch!