Fellow Millennials,
We are the generation labeled as "entitled".
Somehow, our love for avocado toast has clearly been the reason we can't afford to buy a home.
And as such, our frustration with not being able to enter the housing market is deemed unjustified.
If only we'd give up our avocado toast, we might just be able to buy a home. *sarcasm*
Cue, eye roll....
In reality, we've faced many challenges over the years that have made it exceedingly difficult to enter the housing market.
Elder millennials are more likely to own a home if they'd entered the market 5-10 years ago - but many millennials back then were focused instead on education, not buying a home.
While we were focused on getting an education so we could get a good job, housing prices gradually creeped up, student debt loans accumulated, and those prestigious jobs we were supposed to get once graduating university paid us.. well, not very much.
We did everything we were told to do - we were often the first in our family to successfully graduate from post-secondary school - but to what end?
In this blog post, I will explore the challenges that millennials are facing when it comes to getting into homeownership. And I'll provide a few alternative options that can be considered if you wish for homeownership in your future.
Let's get to it.
First - The Challenges
Challenge 1: Affordability One of the primary hurdles for millennials is the skyrocketing cost of housing.
Rising prices, coupled with the burden of student loan debt, high rents and relatively low wages make it difficult not only to qualify for a mortgage but to save enough for a down payment.
No, it's not our love for avocado toast that's the issue.
We have a major issue with housing supply in Canada.
This is a fact.
And too many people competing for not enough houses pushes the price of homes higher - and makes it unaffordable for people to penetrate the market.
Challenge 2: Limited Savings
Millennials often struggle to accumulate enough savings for a down payment due to high living expenses, stagnant wages, and competing financial priorities such as paying off debt (*cough* student loans *cough*) or saving for retirement.
It's no secret that inflation has run rampant the past few years.
Everything is more expensive and wages haven't kept up with inflation meaning less money for millennials to set aside to save for a down payment.
And again, I promise you that eliminating avocado toast isn't going to make much of a dent in our ability to save for a down payment.
Challenge 3: Stringent Mortgage Requirements
Banks and lenders have become more cautious after the 2008 financial crisis, imposing stricter lending standards.
This makes it harder for millennials, especially those with limited credit history, to qualify for a mortgage.
These changes I can actually get on board with - after all, if these strict mortgage requirements weren't in place prior to 2020, there would be A LOT of people in trouble in the next couple of years.
There's already a risk that many people won't be able to afford their mortgage when renewals start coming up in 2024 and beyond, so I believe these strict mortgage requirements are a saving grace for many.
That said, it does is one of the reasons that it's so difficult for millennials to enter the housing market.
Now that we have explored some of the challenges that Millennials are facing when trying to get into the housing market, let's explore some creative options available to Millennials if they want to enter the market.
Alternative Options for Millennial Homeownership
Option 1: Rent to Own Programs
Rent to own programs provide millennials with the opportunity to rent a property with an option to purchase it in the future.
A portion of the monthly payments is typically allocated towards building equity, allowing tenants to accumulate savings for a down payment while living in the property.
This allows people to move into a home today, that they can purchase in the future.
The future purchase price is locked in which protects against further inflation and appreciation - and takes the question out of exactly how much is needed for a down payment since you know for certain what the future purchase price will be. It makes it easier to work toward a static target - rather than the moving target that's been common in this market.
Rent to Own is becoming a much more popular option since many people are finding it difficult to save for a down payment as they chase the home prices upward.
Option 2:Co-ownership and Joint Ventures
Collaborating with friends or family members to pool financial resources and buy a property together can be a viable option.
This approach allows millennials to share the burden of mortgage payments and increase their qualifying power.
And co-owning or joint ventures don't mean that you have to stay in this situation for a lifetime. For many people, the most challenging part is simply entering into the housing market.
But once you're in the market and you start to build equity through mortgage paydown and natural (or forced) appreciation, you can take advantage of your equity to upsize or in the case of a co-ownership or joint venture, to sell and then each buy your own home.
Co-ownership can also be a great option alongside a Rent to Own if incomes are sufficient but down payment is lacking.
Option 3: House Hack
House hacking is a term used to describe when someone owns a home but also generates income by renting out 1 or more rooms or 1 or more units to help cover their living expenses.
From a mortgage qualification perspective, house hacking can help if you buy a small multi-family property, rent one unit and live in the other.
Did you know that the income from the rental unit will actually be factored into your mortgage approval?
The bank will consider the rental income as personal income (at least a portion of it), to help boost your purchasing power. It will also help reduce your living expenses since you have a tenant covering at least a portion of your mortgage and other housing expenses.
House hacking can be a fantastic way to get into the market if you have at least a 5% down payment saved but need a little help qualifying for a mortgage. Or maybe you are just looking for a way to keep your living expenses low.
Option 4: Rent Where You Live, and Own What You Can Rent
This one might be a bit harder to wrap your head around but bear with me.
If you want to live in an expensive city like Toronto or Vancouver, but you still want to own a home, you're better off renting where you live and then buying a home in another more affordable city and renting out the home that you own.
Rent in a city like Toronto or Vancouver, while still expensive, will be cheaper than buying a home in those cities - and chances are you would have a hard time qualifying for a mortgage in either of those cities anyhow.
So to provide you with the benefits of owning a home (equity, appreciation, etc.), why not buy a home in a different, more affordable city, and rent it out to tenants.
Your tenants will pay for the home and you will reap the benefits of mortgage paydown, appreciation and equity growth.
You will also have the flexibility to move whenever you like since you're not tied down to the place that you live in.
And if or when the time comes that you want to plant roots, you will at least have been able to gain some equity through your rental property that you can use to help you land your dream home.
Conclusion
While the path to homeownership may seem challenging for millennials, there are alternative options available that can help overcome some of the barriers they face.
It might mean a bit of sacrifice in the short term and some mindset changes in the present - but right now it might be the difference between entering the housing market and sitting on the sidelines.
Leave a comment below or email me (hello@hello-homeowner.com) directly if you want to learn more.
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