John and his fiancée are owners of a $700,000, five-bedroom home in Whitby, Ont., where the housing market is booming thanks to demand from people priced from nearby Toronto. “The frightening part is simply that we are young,” John said in an interview we did after ditching e-mails. It’s plenty of cash and also our first time to make a large purchase like this. Are we planning it correctly?”
Affordability is a setting sun for plenty of millennials from the Toronto and Vancouver home markets, but this couple can manage it. Looking at their story might help you decide if you are in a position to purchase, or whether you’re priced out.
Having the ability to afford a house is the No. 1 financial concern of millennials, according to an online poll that Globe and Mail used to create their new Gen Y Currency page. I’m convinced plenty of millennials can not properly afford a home and should continue to lease for the close and even long term. However, as John and Carol show us, some young adults can purchase.
But, you need to put as much effort into your affordability analysis as you do in trying to find the ideal house. Make the home fit your financing, or do not purchase. Following an honest analysis, many won’t wind up buying. John and Carol’s home does fit their financing. John is a consultant, and Carol is a health-care professional — collectively, they make about $200,000 annually. That is sufficient to have enabled them to save a 10-per-cent deposit without parental money.
There is a rough rule of home buying that your home should cost up to three times your gross wages, and this couple came admirably close in the current expensive market at 3.5 times. His second step in estimating the affordability of purchasing was to use my Real Life Ratio spreadsheet, which you may download here. The spreadsheet is designed to see how well you can handle a mortgage, utilities, and house maintenance costs in addition to daycare, car loans and, most of all, long-term savings.
And yet, he worried about purchasing and then being caught in the home market pullback that some analysts have predicted for some time now. They bid on three possessions and lost out in every case, and in four other cases they backed off due to a large number of bidders. After all this frustration, John wondered if perhaps it’d be better to wait to purchase until home prices dropped. Carol disagreed. “She’s considerably more believing that if we do not get in now, we are going to miss out,” John explained.
Here is what I told John about home corrections: If you keep in your home for at least 10 years, a decrease in home prices in the next while probably won’t matter much. The market will return, and after that, it will stabilize and begin to rise again. Meanwhile, you will be building equity the old-fashioned manner — by paying down your mortgage.
Due to the earning ability and willingness to purchase well outside Toronto, John and Carol managed to skip the tiny starter house and buy something that will match them even when they have children. “This house will encourage us for over 10 years,” John explained. “Family-wise, there is a good deal of room.” John and Carol planned their home purchase correctly. If there’s a down side to their story, it is that proper preparation will tell a good deal of other millennials that they can not afford to purchase.