Posthaste: Millennials delay dream of buying their first home as prices soar to unattainable levels

Good morning!

Canada’s runaway home prices are putting off first-time home buyers, especially millennials, according to a new report.

Bank of Montreal’s new survey out this morning reveals that many first-time home buyers are sitting on the sidelines, waiting for the market to calm down. They may be waiting a long time.

“Close to 40 per cent said they plan to hold off on buying a home until prices come down; millennials are the group most likely to wait,” the survey noted.

The most pessimistic first-time buyers were to be found in Ontario, closely followed by those in B.C. and Quebec. Residents in Alberta and the other Prairie provinces were most optimistic that their dream of owning a home was imminent.

“Compared to last September, sentiment around affordability has cooled for over a third of first-time buyers,” BMO said in a release. “In this latest survey, 32 per cent are indicating that now is a good time to buy. Demographically, millennials were the least likely to be optimistic about buying in the current market (30 per cent).”

First-time home buyers were looking to pay on average $433,000 for a new home, with those in British Columbia anticipating a payment of as high as $586,000. Ontario residents were expecting to pay around $529,000 for their, most likely, starter homes. You can see why they may be setting themselves up for disappointment, as average home prices in the Ontario and B.C. are well over $860,000.

“While some buyers are looking to accelerate their move into the market anticipating price appreciation, we are seeing others pause on their homeownership plans,” Hassan Pirnia, head of personal lending and home financing products at BMO, said in a release.

Canadian residential real estate prices have been on a tear over the past year, defying the odds in the face of a year-long pandemic and low immigration levels. Home sales reached a new all-time record in January, while prices are up 13.5 per cent on average year-on-year, according to the Canadian Real Estate Association.

Royal Bank of Canada says the overheated residential market will require a policy response, especially as Canadians’ obsession with real estate is taking away investments from more productive capital uses and will likely exacerbate inequality.

The bank recommends expanding supply by lightening regulatory burdens for new housing approvals, adjusting municipal zones to facilitate the development of more family-friendly housing and encouraging investments in for-rent apartments.

“Policymakers should look at a range of options to discourage speculative activity as this could generate further volatility,” wrote Robert Hogue, an economist with RBC, in a report published Wednesday. “We find New Zealand’s just-announced phasing-out of mortgage interest expense tax-deductibility for investors an interesting proposal.”

One recommendation which raised eyebrows on social media was the government’s tax exemption status of capital gains on the principal residence.

“These considerations will be complex, controversial and no doubt fraught with unintended side-effects. Yet this support was largely designed during times when interest rates were much higher, and in some cases to counter the effect of high rates,” Hogue wrote, arguing that with the central bank committed to low interest rates, there was need to recalibrate the real estate market.

With some expecting a federal election to be held soon, the political parties’ policy responses to the housing market could even emerge as an hot-button election issue.

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