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Why first-timers should rethink buying in a hot housing market

The Fear of Missing Out phenomenon in the housing market is leading to bad buying decisions.

First-time buyers should be much more afraid of getting into a hot real estate market. The risk of taking on more financial weight than you can carry has never been higher.

The story of a woman we'll call Jane and her family highlights the risk of having your finances smothered by home ownership. Jane and her husband bought a bungalow in one of Toronto's satellite communities in early 2012 for $290,000. Weighed down by debts, they sold a couple of years later for $430,000 and rented. "We were hurting – living paycheque to paycheque," Jane says of their time as owners.

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A lot of young home buyers seem to be in a similar situation. In a recent survey commissioned by Canadian Imperial Bank of Commerce, almost 40 per cent of millennials (aged 18 to 34) owned homes. In that group, a strikingly high 81 per cent said they planned to sell.

Almost two-thirds of those who plan to sell said mortgage and housing costs are making them cash poor, and 57 per cent worried that rising interest rates would make it harder to make their mortgage payments. Just over one-third felt that renting was the better option.

Keep in mind that this poll was national and thus included people in real estate markets that are hot, cold and just right. If there's an outbreak of buyer's remorse in this group, you have to wonder what's ahead for people buying in places like Toronto. This is a market so hot that that the city's mayor held a summit meeting with the federal and Ontario finance ministers Tuesday to discuss housing affordability.

Jane's situation shows how the demands of home ownership reduce your ability to adapt financially in life. Between career changes, having a baby and carrying debt, they found their home unaffordable. It wasn't just the mortgage. "We had a leaky basement, and we had plumbing issues like constantly clogged sinks," Jane said. "The driveway was a disaster. We had a pool – it was very old and crumbling because it was concrete."

Selling the house enabled the couple to pay off their debts, reduce stress and build up their investments. They now rent a home for $1,500 all in, and are thriving in a financial sense. In fact, Jane now wonders if it's time to get back into the housing market. "I'm starting to panic a little bit because I'm thinking we're never going to get back in, no matter how much money we make."

Such is the power of FOMO, or the fear of missing out. Even people who strategically retreated from home ownership feel it. The smart response for Jane and all other prospective young buyers is to be doubly certain they can afford to buy. Our Real Life Ratio calculator can help with this analysis.

The grey zone between affordable and unaffordable is where mistakes are made in hot housing markets. FOMO-driven buyers will rationalize their purchase on the basis that rising prices validate short-term affordability problems. Your home is a great investment, in other words.

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Jane's experience shows this rationale for buying doesn't compute. She and her husband sold before prices really began to surge in the Greater Toronto Area, but the price of their home still increased by very close to 50 per cent. Did this help them pay their bills? Clearly not. In fact, the only way for them to benefit from this increased equity was to sell and rent.

She and her husband and young son now live in a rented three-bedroom home with a basement apartment occupied by another couple. The disadvantages are what you'd expect – a lack of living and storage space, and no backyard for gardening. This explains why Jane and her family are starting to think about either a bigger rental or buying a newly built home in a community further away from Toronto.

As for their old neighbourhood, she's more afraid to buy in than she is to miss out. "I guess we could afford it," she said. "But we'd be miserable."

Video: Drawing Conclusions: How much money do you need to rent in cities across Canada?
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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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