Congratulations to a couple we'll call Bob and Carol on the purchase of their first home.
Bob was nervous about buying into a market he considers overvalued, but I helped ease his mind. Now he and his fiancée are owners of a $700,000, five-bedroom house in Whitby, Ont., where the real estate market is booming thanks to demand from people priced out of nearby Toronto.
"The scary part is just that we're young," Bob said in an interview we did after exchanging e-mails. "I'm going to be turning 28 and my fiancée is 30. It's a lot of money and our first time making a big purchase like this. Are we planning it properly?"
I say they are. Affordability is a setting sun for a lot of millennials in the Toronto and Vancouver housing markets, but this couple can handle it. Looking at their story may help you decide if you're in a position to buy, or if you're priced out.
Being able to afford a home is the No. 1 financial concern of millennials, according to an online questionnaire we used to develop our new Gen Y Money webpage. I'm convinced a lot of millennials can't properly afford a house and should continue to rent for the near and even long term. But as Bob and Carol show us, some young adults can afford to buy. The question is, should they?
My advice: If you want it and can afford it, buy it. But, you have to put as much effort into your affordability analysis as you do in searching for the right house. Make the house fit your finances, or don't buy. After an honest analysis, many won't end up buying.
Bob and Carol's house does fit their finances. Bob is a consultant and Carol is a health-care professional – together, they make roughly $200,000 a year. That's enough to have allowed them to save a 10-per-cent down payment without parental money.
There's a rough rule of home buying that your house should cost up to three times your gross salary, and this couple came admirably close in today's expensive market at 3.5 times. "I wanted to be at three times income, but you win some and you lose some," Bob said.
His next step in gauging the affordability of buying was to use my Real Life Ratio spreadsheet, which you can download here. The RLR is designed to see how well you can manage a mortgage, utilities and home maintenance costs as well as daycare, car loans and, most importantly, long-term savings.
Bob and Carol aced the ratio. Bob says he got a 60.1 score, which is well under the 75 threshold for home ownership being doable. "The Real Life Ratio spreadsheet really put me at ease," he said.
And yet, he worried about buying and then being caught in the housing market pullback that some analysts have been predicting for a while now. In looking for a house, Bob and Carol got a close-up view of the buying frenzy that has pushed prices higher in Toronto and surrounding communities. They bid on three properties and lost out in each case, and in four other cases they backed off because of the high number of bidders.
After all this frustration, Bob wondered if maybe it would be better to wait to buy until housing prices fell. Carol disagreed. "She's much more thinking that if we don't get in now, we're going to miss out," Bob said.
Here's what I told Bob about housing corrections: If you stay in your house for at least 10 years, a decline in house prices in the next while likely won't matter much. The market will go down, and then it will stabilize and start to rise again. Meanwhile, you'll be building equity the old-fashioned way – by paying down your mortgage.
Because of their earning power and willingness to buy well outside Toronto, Bob and Carol were able to skip the small starter home and buy something that will fit them even after they have children. "This house will support us for more than 10 years," Bob said. "Family-wise, there's a lot of room."
Bob and Carol planned their house purchase properly. If there's a down side to their story, it's that proper planning will tell a lot of other millennials that they can't afford to buy.