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Moving Up Out of Starter Homes Getting Much More Difficult for Canadians

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While, on average, Canadian house prices have climbed five per cent in 2014, a new report finds that price increases in mid- and high-priced homes are far outpacing those of lower-priced ones, which is making it increasingly more difficult for many Canadians to move up out of their starter homes.

“The value of bigger and pricier properties is rising notably faster than less expensive properties—widening the gap between starter home and dream house,” says Benjamin Tal, Deputy Chief Economist at CIBC. “Regardless of what your starting point is, and by how much your property has appreciated, the desired move up target is getting further and further out of reach.”

He notes that, historically, most Canadians followed a well-known narrative. “You graduate from school, land your first job, get married, buy your first house, start a family, and after a number of years, move up to a larger house to accommodate your growing family.”

“However, there are many indications that this cycle that dominated the Canadian housing market for decades, is breaking,” he points out.

The report shows that, in Toronto, the price of homes in the $300,000 to $500,000 range rose, on average, about 28 per cent between the first quarter of 2010 and the first quarter of 2014. However, homes priced between $800,000 and $1.2 million jumped over 40 per cent and homes priced between $1.2 million and $1.6 million shot up better than 50 per cent in the same period.

That means the family that paid $500,000 for a house in 2010 has seen their home value climb to about $640,000, a tidy $140,000 increase in value. The problem is the $800,000 home they want to move into has jumped by more than $300,000 to $1.12 million. It’s a similar situation in other urban centres, including Ottawa, Calgary and Edmonton, where the move up category has risen notably faster than the start-up category.

In Vancouver, with the highest prices in the country, that gulf is even wider. Homes that sold for $500,000 to $800,00 have increased by only a few percentage points whereas homes prices at $1.1 million and higher have jumped by close to 18 per cent. The gap between these homes has grown by close to $200,000 in the last four years.

Mr. Tal notes that while, on the surface, the volume of house resale activity in Canada looks stable – with unit sales fluctuating between 35,000 and 40,000 units per month since 2010 – it is anything but. “This apparent stability masks a more complex story,” he says. “Sales of units at the low-to-mid price range fell notably since 2010. Sales rose modestly for the mid-to-high price range, and advanced rapidly for units in the upper end of the market.

“This picture of soft sales at the low-to-mid price range of the single-detached market has affordability written all over it. Tightening mortgage regulations in general, and the reduction in amortizations from 40 years to 25 years for high-ratio mortgages in particular, alongside rising prices worked to price out many first-time homebuyers that dominate activity in this price range.”

He found that the homeownership rate among Canadians aged 25-35 (first-time homebuyers) has fallen from 55 per cent in 2012 to the current 50 per cent. For those over the age of 35, the homeownership rate remained stable.

There is also a big difference between markets with sales and price increases increasingly being driven by activity in the country’s large and pricy cities. Conversely, we’ve seen prices fall in Saint John, Québec City and Victoria in the last year and overall more than one-fifth of sales are now in cities that see prices rising by less than the current rate of inflation.

Homeowners in many of Canada’s larger cities that can’t afford a larger home – or won’t get into bidding wars – are increasingly recognizing they will be in their first home for longer than expected. “With limited move up options, it’s no surprise then that many Canadians choose to renovate their existing homes,” says Mr. Tal.

“Over the past five years, spending on home renovations as a share of total residential investment averaged close to 46 per cent—by far the largest share on record. Renovation activity will remain robust and, in fact, might accelerate in the coming years.”

Mr. Tal says that while home values will be tested when interest rates rise, the asymmetrical nature of the market, the stabilizing role played by the condo market in major urban centres – which is providing a cheaper alternative to single-detached units – and the significant constraints on land availability may all work to limit the damage.

The complete CIBC World Markets report is available at: