buyer gridlock-compressed

Photo: James Malone/Flickr

The problems faced by first-time homebuyers in Vancouver and Toronto get a lot of attention, but Millennials aren’t the only ones having a tough time fulfilling their real estate needs in those cities.

In a report released last week, TD Chief Economist Beata Caranci uses the term “buyer gridlock” to describe the issues affecting owners of entry-level homes who want to “trade up.” Many of these homeowners have seen large increases in the value of their homes, and due to lifestyle changes — such as children or higher income — would now like to purchase a more suitable place to live. However, because they will still need to either take out a large mortgage or dig into their savings to move into a home or neighbourhood that’s even slightly better, they’re often choosing to stay where they are.

Caranci likens the dilemma to a game of Monopoly. Normally, on their first trip around the board players will purchase a cheap property like Baltic Avenue or Connecticut Avenue, but will still have enough money left to buy more expensive properties like Marvin Gardens or Pennsylvania Avenue. However, in Vancouver and Toronto, Connecticut Avenue is essentially now selling for as much as Marvin Gardens.

The image below lays out the problem visually. There simply are not very many single detached homes available for sale in the Greater Vancouver and Greater Toronto areas. And of those available, many are not below the median price — fewer than one-third in the Greater Toronto Area, and just under one-quarter in the Greater Vancouver Area. Essentially, existing homebuyers trying to trade up will have very few buying opportunities unless they are looking at single detached homes above the median price — in Vancouver, that’s over $1 million, and in Toronto it’s just under $750,000.

buyer gridlock 2-compressed

Image: TD Economics

The situation has had numerous consequences for current entry-level homeowners. Caranci points out that many are choosing to trade up by moving into larger and more affordable homes in the suburbs. That trend is leading to higher housing prices in these more distant areas, and is also contributing to “strained infrastructure and congestion.”

Other current homeowners are opting to renovate their entry-level homes rather than trade up, which comes with its own problems. As Caranci explains, “a home conversion can take what was once considered an entry-level detached residence into the category of a trade-up, further tightening the available and affordable supply at the lower end of the market.”

That lack of supply isn’t good news for first-time homebuyers in Vancouver and Toronto. After all, if people who want to move out of their entry-level homes aren’t able to do so or are transforming what were once entry-level homes into trade ups, that means fewer entry-level homes are available for first-time buyers. As a result, first-time buyers are increasingly being restricted to purchasing small condos or to renting for longer periods of time.

For now, it seems there are few opportunities for relief. Caranci ends by noting that population growth in the Greater Toronto and Greater Vancouver areas is about twice as high as it is anywhere else in Canada, while investor interest in both areas also remains high.

“Ultimately, Toronto and Vancouver are moving the way of many international cities, where land constraints and population growth forces residents out and up. Out into suburbs and up into condominiums, be it ownership or rental,” she concludes.

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