$200K down payment zones – how close are we?

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So far, only Toronto and Vancouver force the average buyer to save up $200,000 in order to buy a detached house. But other cities are getting close to that threshold.

There aren’t yet any cities in Canada where every property requires a minimum $200,000 down payment. Buyers of detached homes in Toronto and Vancouver already need more than that to make purchases, but recent data suggests millions of other Canadians may soon join them.

In its spring 2021 Housing Market Outlook, Canada Mortgage and Housing Corporation projected home prices in 18 metropolitan areas through the end of 2023. Of those, six have the potential to become $200,000 down payment zones.

Housing outlook
Average Sale Price - 2018 Average Sale Price - May 2021 % Change Projected Average Sale Price - 2023 Projected % Change - May 2021 to 2023
Canada $490,931 $688,000 40.1% $704,900 2.5%
Victoria $700,008 $905,724 29.4% $949,024 4.8%
Vancouver $975,795 $1,172,800 20.2% $1,395,000 18.9%
Toronto $787,976 $1,108,453 40.1% $1,205,400 8.7%
Oshawa $591,172 $772,119 30.6% $987,400 27.9%
Hamilton $562,820 $792,746 40.1% $890,000 12.3%
Kitchener-Cambridge-Waterloo $484,596 $742,248 53.2% $852,900 14.9%

Source: CMHC, CREA, VREB, DRAR, RAHB

Only two of those markets, Toronto and Vancouver, are expected to see average prices exceed $1.2 million by the end of 2023. But estimates for some cities appear conservative.

For example, it may be unreasonable to assume the average price in Victoria, B.C., which rose 29.4% in the two-and-a-half years between late 2018 and May 2021, will increase only 4.8% between now and the end of 2023. Likewise, the Kitchener-Cambridge-Waterloo region in Ontario. Will price growth there really fall from 53.2% over the past 29 months to 14.9% over the next 30 months?

Anything’s possible, but with an estimated 1.2 million new immigrants expected over the next three years there will be an increase in demand that’s sure to create pressure on Canada’s inadequate housing supply.

“We'll absolutely see the growth of investment funds purchasing houses and condos to rent out,” says Canadian Housing Crisis, a housing advocacy group, in an email statement. “This is already the case, but it will worsen.”

What could slow price growth?

Brown snail climbing  the pile of coins
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A rise in interest rates could slow the pace of home-price growth. It's possible much of the current buying frenzy is fueled by people who believe they'll lose their chance to buy if rates climb.

Benjamin Tal, deputy chief economist at CIBC World Markets, says the only thing that might delay the arrival of $200,000 down payment zones is an increase in interest rates.

Tal says Canadians’ high debt levels make them sensitive to rising interest rates. He estimates a 1 percentage point interest rate increase today would have the same impact on consumers that a 2 point increase would have had two years ago.

With the Bank of Canada expected to start raising rates in the second half of 2022, Tal expects housing demand to recede to pre-pandemic levels.

“I think the housing market will go back to where it was, and where it was wasn’t really a weak market,” he says. “What we have seen during COVID was simply the borrowing of activity from the future. There was this sense of urgency to get into the market given the extremely low interest rates. People who were basically planning to buy a house a year from now did it today just to take advantage of this window.”

Still, Tal doesn’t feel interest rates will knock the housing market off its current trajectory.

“I think there is a reason to believe that [$200,000 down payment zones] will materialize. I think that the housing market, especially in major cities, will remain unaffordable,” he says.

Fallout of unattainable home prices

worried young woman is doing banking and administrative work holding bills at home.
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If people have to spend too high a percentage of their incomes on housing, other sectors of the economy could suffer as consumers scale back spending.

In a housing market where $200,000 down payments are the norm, who gets to own a home? Potentially only two groups: the wealthy and those who already own homes from which they can pull equity.

“It’s a huge problem,” says Paul Taylor, president and CEO of Mortgage Professionals Canada. “Honestly, that is probably the largest scenario concern we’ve been posing to the federal government.”

It’s hard to imagine anyone else saving that much money, particularly when the average Canadian was earning less than $50,000 a year before the pandemic. National Bank of Canada estimates it would take 316 months to save up a down payment for an average-priced home in Vancouver and 278 months in Toronto.

So, what happens when the average Canadian needs more than 20 years to save a down payment while a shrinking portion of the population has capital on hand?

The real estate market

Historically, once a local housing market becomes too expensive, buyers migrate elsewhere and start a new cycle of rising prices. If a city winds up being a $200,000 down payment zone, anyone committed to buying, but unable to save that amount, will have no choice but to fight over properties in nearby cities.

The question is will there be enough buyers in these markets to support the kind of real estate activity needed to maintain million-dollar prices across the board? Yes and no.

Most Canadians won’t earn or save enough to be able to afford a million-dollar property. If demand flatlines in these expensive cities, prices may have to recede in order for listings to find buyers.

But Canada is expected to be home to close to 3 million millionaires by 2025, according to a 2018 Credit Suisse Global Wealth Report. These Canadians will have the resources, either cash or equity, to continue purchasing $1 million-plus homes.

There will also be thousands of homeowners sitting on more than $200,000 in equity in their properties, which they could gift to children as down payments or use for down payments of their own. That, too, should keep the market churning.

But if too many buyers need their parents’ help to buy property, the number of families who benefit from real estate-generated wealth will eventually stall.

The economy

Real estate is one of the most consistent ways to create generational wealth.

Aside from the value of the asset itself, the equity within a home can help owners pay for their children’s educations, launch new businesses or chase other investments, all of which contribute to rising incomes and increased spending.

“Some research [shows] that higher levels of inequality are associated with an inability to sustain economic growth,” says British Columbia Real Estate Association chief economist Brendon Ogmundson. “That higher inequality means less access to credit markets for lower-income households, which leads to an inability to invest in education and other factors that impact social mobility.”

Tal predicts that the next chapter of Canada’s real estate story will see a rise in the number of families living in condos due to their current affordability.

But, assuming those families will be living in two- and three-bedroom units, the monthly maintenance fees may become exorbitant. For example, over three years, a $500 monthly maintenance fee would cost a condo owner an additional $18,000.

Plus, if homeownership leaves a new generation of families house poor, it will inevitably be a drag on consumer spending and the overall economy.

“Well-paid professionals will be taking hundreds of thousands of dollars out of the economy and socking it away in savings to reach the down-payment threshold,” predicts Canada Housing Crisis.

Preventive medicine

Yellow shopping cart and small wooden toy house on natural green blur background.
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Building more housing stock could temper price increases, but getting new developments approved and built is difficult in many municipalities.

Low inventory is making Canada’s housing plight worse and it’s believed a supply surge would help decrease competition among buyers and subsequently reduce the number of bidding wars.

“The point is to ensure the current conditions we are seeing, with prices rising rapidly, do not continue and we get balanced growth in those markets,” Ogmundson says. “But to achieve that balance we need a large expansion of the housing stock.”

That won’t happen fast. And while decisionmakers wrangle over how to bring more supply online, prices will likely continue to escalate.

Canada Housing Crisis says they’re intrigued by a supply solution enacted in California.

“They basically set a quota for new building construction based on local factors, then asked localities for a plan to reach that goal. If they fail, they lose zoning protections and building happens without local input,” CHC says. “That is the kind of ultimatum we need.”

Tal says an increase in supply needs to be met with a similarly ambitious strategy around renting, one that both increases the supply of purpose-built apartments and removes the stigma of being a lifelong renter.

“We have to change the attitude towards renting,” he says. “You’re 35 years old, you’re married, you have two kids and you are renting – nothing is wrong with you. That’s the way it is in Manhattan, Berlin and London.”

About the Author

Clayton Jarvis

Clayton Jarvis

Reporter

Clayton Jarvis is a mortgage reporter at MoneyWise. Prior to joining the MoneyWise team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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