My parents bought the house they live in, the one I grew up in, about 26 years ago. Back then, the price they paid for the house was pretty typical, about $200,000. Recent government property assessments have put the value of their house in the neighbourhood of $700,000. Realistically speaking, they could sell their house for $800,000+.
I think it’s great that their main asset has appreciated so much. It’s something they can use to their advantage when they retire in about a decade or so.
But where does the situation of ever-increasing house prices leave first-time homebuyers? Housing prices in Vancouver are sky-high right now, and they’re probably not going to drop anytime soon. Coupled with this is the fact that first-time homebuyers tend to earn less money than the national average because they’re younger and have less job experience.
I recently saw an ad for a new condo development that proudly proclaimed prices of “less than $600 per square foot!” Five years ago, $400 per square foot would have been a high price to pay. Since then, prices have increased 50%-120%, depending on the location.
This is insane. Average people, making $35,000 per year, cannot afford to buy a home in today’s market. If they do, it will definitely be a case of “house rich, cash poor.”
So what can you or I do about this. At first glance not much, other than hold off on plunking down a huge chunk of money for a tiny concrete box in a much larger concrete box. But I doubt this is going to happen in the big rush to own a home.
Realistically, as tired as this sounds, first-time homebuyers should wait a few years and save up for a larger down payment. There are several reasons for this.
- A larger down payment equates to a smaller mortgage. You shouldn’t be caught in a situation where your payment takes up more than 30% of your gross income. Any more than this and you will have less money to spend on necessities such as food, clothing, and taxes, not to mention extras like entertainment, vacations, and hobbies.
- Having the discipline to start saving your money now is a good habit to get into. After you buy your home you will find that managing the costs of home ownership can be daunting, no matter how well you plan. It will require discipline. Maybe you’ll have to forgo that vacation you’ve been planning in order to pay for a new hot water tank.
- This point is my own opinion. I expect that after the Olympics have left Vancouver, housing prices will drop. Prices have been rising these past few years for a variety of reasons, but the main ones are: Olympic construction has been pushing the costs of all other construction (including apartment buildings) higher; interest rates were near historical lows; and land speculators from outside the province buying homes.After 2010, there will be a glut of construction workers, lowering wages across the board. Construction projects should be less expensive, and therefore these new homes should cost slightly less. Interest rates began to rise about a year ago, but still haven’t risen significantly. I expect that over the next few years the rate will continue to slowly rise if the Canadian economy slows down, making the prospects of taking on a mortgage less attractive. Finally, land speculators will begin a huge sell-off after 2010 in antcipation that the end of the Olympics will mean a corresponding drop in housing prices. I don’t believe that housing prices will drop because the Olympics have ended, but will drop because of this sell-off. It’s sort of a chicken-and-egg scenario.
So there you have my thoughts. I’m not an economist or avid market watcher, so I strongly suggest, implore even, that you take all this with a grain (or two or three) of salt. But I do believe that homes in Vancouver are currently over-valued, and that there will be an adjustment of at least 5%, possibily 10%, in the next few years. Let’s hope this is true, because I plan to buy a home around that time.