Millennials Are About to Have a Major Impact on Real Estate Market
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Generation Y represents a massive group of people looking to break into the real estate market. But will affordability challenges and new mortgage rules stand in their way?
Facing challenges their parents never had to deal with, millennials are forced to contend with significant obstacles, depending on where they live, says Phil Soper, President of Royal LePage. While finding a job today is relatively easier in major hubs like Toronto and Vancouver than in other parts of Canada, buyers there run into limited supply and high home prices. Meanwhile, in places where housing is more affordable, the job market may be less stable.
"Demand for real estate from this generation is incredibly strong: only a third of this large demographic group currently owns their own home, while the overwhelming majority want to become homeowners."
According to a new Royal LePage report, the number of Canadians aged 25 to 30 is projected to grow 17% by 2021 compared to 2016. And this enormous group will carry substantial purchasing power.
"Whether they end up buying or renting, millennials will inevitably shape the real estate market simply because of their sheer size," Soper notes. "We expect this demographic group to put additional pressure on entry-level housing, as well as on investment properties used to help address the limited supply in the purpose-built rental sector."
The desire for homeownership among this group of Canadians turned out to be quite strong: a Royal LePage survey found that 87% of Canadians aged 25 to 30 consider homeownership a good investment.
That said, while last year's changes to mortgage rules are clearly making it harder for young buyers to enter the market, there's a bigger obstacle standing in their way. "One section of the recent report focused on how the millennial generation views the government's tightening of mortgage insurance rules as a problem," said Phil Soper. "But I'd say an even bigger problem has been the 20% annual rise in home prices."
According to the report, 49% of millennials say the government's changes to mortgage rules have affected housing affordability for them. As a result, they've had to consider cheaper housing options.
"When it comes to their home search, 53% of millennials across Canada plan to spend up to $350,000, which typically gets you a home with 2.5 bedrooms, one and a half bathrooms, and 1,272 square feet of living space," the report states. "But given that 58% of respondents earn less than $69,000 a year, and only 34% currently have enough saved for the 20% down payment needed to qualify for a mortgage in that price range, the real odds of becoming a homeowner are fairly low."
"The report found that 64% of this generation consider homes in their region unaffordable, with a significant share of respondents in British Columbia (83%) and Ontario (72%) calling prices outright excessive. Among those who don't believe they'll be able to buy a home in the next five years, 69% said they can't afford housing in their region or the type of home they want. Meanwhile, nearly a quarter (24%) simply can't qualify for a mortgage."
The study also found that 61% of millennials would prefer to buy a detached home, but only 36% believe that dream is actually within reach.
Some American research on this topic is worth a look too, and it can quite reasonably be extrapolated to Canada.
For a long time, Americans put their money into securities. But a clear new trend has emerged on the horizon. In 2007, almost two-thirds of Americans invested in securities; last year, that figure was down to just half. This new generation of investors is paying much closer attention to real estate.
RealtyShares recently teamed up with Harris Interactive to jointly research and publish a report on real estate investment, based on a survey of Americans about their investment preferences. That survey found that 55% of millennials are interested in real estate investing - the highest figure among any demographic group surveyed. Fannie Mae's research backs this up, reporting that 85% of millennials consider real estate a good investment option. Given this level of interest in the sector, it's crucial to understand why millennials are so drawn to it, and how they might invest going forward.
Why does this matter? Probably because, as of last year, millennials became the largest generation in the United States. According to a recent report, there are now 75.4 million members of this generation living in the US, compared to 74.9 million baby boomers. As the largest age group, millennials will have enormous power to shape the market as their wealth accumulates. Which means it's essential to start examining how millennials view real estate and investment opportunities more broadly, right now.
Survey participants were asked to name the best-performing investment since 2000 from among the following options: securities, real estate, commodities, bonds, and cash equivalents such as oil, gold, and textiles. Overall, 40% said they weren't sure, while 25% named securities as the best investment.
In reality, though, real estate outperformed the stock market over that period. Millennials got it right: between 2000 and 2016, the SandP 500 delivered an average annual return of 5.43%, while real estate delivered 10.71%.
While older generations may be more interested in downsizing from a larger home to a smaller one, millennials are having children and climbing the career ladder. For them, buying a home is simply the next logical step. Given the potential returns on the horizon, millennials have chosen the right path. The report suggests real estate has every chance of becoming the best-performing investment out there, and this new generation isn't about to miss its chance.