The Decibel - Gen Z’s housing struggles are worse than generations past

Episode Date: October 7, 2022

In the second quarter of 2022 housing affordability in Canada saw its “worst deterioration” in more than 40 years. At the same time, rents across the country are skyrocketing. For young adults between the ages of 25-29, that means living on your own is more out of reach than ever – even if you’ve graduated from university and have a full-time job.Personal finance reporter, Erica Alini crunched the numbers to get a snapshot of just how expensive it is for young adults trying to find a place to live right now.Questions? Comments? Ideas? Email us at [e-mail]

Hi, I'm Mainika Raman-Wilms, and you're listening to The Decibel, from The Globe and Mail. It's no secret that buying a house has gotten impossibly expensive. But a new analysis from The Globe has found that the out-of-control real estate market has actually started making even renting a place out of reach for young people. And the shock was to find out that their household income in every single city I looked at would be short of what they would need. Erica Alini is the Globe's personal finance reporter. And she crunched the numbers to find out which Canadian cities are the most expensive, the most affordable, and why today's housing struggles for young adults are different than before. This is The Decibel.

Erica, thank you so much for being here today. Thank you for having me. So, Erica, you crunched the numbers here to find out how bad the state of housing and rent really is in Canada right now. What did you find? How bad is the cost of shelter in this country at this point? Yeah, so housing, like we used to say buying a house, but at this point with rents as expensive as they are, like keeping a roof over your head is the financial challenge for young Canadians. And by young Canadians, honestly, like more and more, we're talking about Canadians in their, even in their mid to late thirties. What I wanted to look at in my story is, okay, so you have a good job, you're working full time, can you afford a place of your own, whether you are renting or whether you're buying a home? And the answer is in a lot of not just big cities, but increasingly mid-sized cities, that answer is probably no. So across those cities, I got some estimates of after-tax income and I

restricted it. So I wanted to look specifically at people with a university degree working full-time because I wanted to show like, okay, so let's say you're in a pretty good position financially. Can you afford to rent your own place? So I assumed that, you know, some kind of median after-tax income in those cities. And then I looked at the average rent for one bedroom. And then I assumed that, you know, this people in their sort of mid to late 20s, was like okay let's say that they have an average amount of student debt which in Canada we have some old statistics we're waiting for the new ones to come out but it's been hovering around 30,000 for for students who have debt with the exception of Quebec which is almost half of that so I was like okay so let's say that you're taking the maximum

amount of time to repay those government loans. So you have a student loan payment of $260 a month. And basically, you keep living like an undergrad. Let's say like you're super frugal, and you keep living like an undergrad. Can you afford the average one bedroom as it's being advertised right now and what did you find so i found that in vancouver and toronto you'd be in the red monthly every month you'd be several hundred dollars short in vancouver it was like almost four hundred dollars short in toronto's like more than a hundred dollars this is with a bachelor's degree and a full-time job this is with a bachelor's degree and a full-time job. This is with a bachelor's degree and a full-time job.

And Halifax, you'd be basically breaking even. I get you have eight bucks left in your pocket at the end of the month. And then Victoria starts to look a little bit better. You'd have, you know, like $250 more or less left. Montreal, better still, like, you know, over $600. Same for Calgary. Hamilton, almost $700. And in Ottawa, it looks quite good. I want to ask you about Halifax, because this is a little, a little bit of a surprise to me. Like, how long has Halifax been this expensive for?

So yeah, what happened with Halifax is really, with the pandemic and sort of this remote and hybrid work, a lot of people moved from other provinces and Ontario in particular to Halifax. And they started buying up homes and that sort of put pressure on home prices, but it also put pressures on rents. And so and we've seen that throughout southern Ontario too, that that move away that in Ontario was like, it was kind of a domino effect of people moving away from Toronto. And then some of the local households aren't able to buy homes anymore, and then you have more pressure on rent. So we've been talking primarily about paying rent. And of course, a lot of people like to rent until they can actually afford to buy a house. We asked people to chime in on social media about their housing concerns, and we heard from a lot of people about this specific thing. Jessica Patterson said their biggest financial concern was rent each month because, quote, we'll never be able to save enough to buy a house.

And Leah Kuzma shared a similar concern about not being able to afford rent and actually save for the future. So, Erica, what did you learn about how possible it is for young people today to actually save up for a home? So this is one of the things I wanted to look at going into the story. And my assumption was exactly the same. How can people save up for a house when they're spending so much on rent. And this was the single biggest surprise of me reporting the story was to find out that that's not even the issue. Let's say you have a, you know, someone who has a very healthy income, and then they're putting everything aside for a down payment. And they're lucky they're in a long term relationship with with someone else who also can afford to have their own place. And they also save up as much. And in the span of

eight years, so let's say they're 25. So by the time they're 33, they have amassed a minimum down payment for an average priced home in whatever city they're living in. Let's talk about down payments then. Stephen Hepburn wrote to us. He said he's concerned with saving up for a down payment. It seems impossible to do on your own. So Erica, let's get into the numbers here. How much money do you actually need up front in different housing markets across the country? So I tried to come up with an estimate of average home prices in 2030. And that's because I was thinking about, you know, someone who is in their mid 20s right now. And so I tried to come up with what was a sort of conservative estimate of what housing prices might be in 2030. I just

assumed that home prices in all of these cities that I looked at would grow by one percentage point per year on average above the inflation rate. And so in Vancouver, people would need to come up with almost $290,000 in upfront cash to buy an average price home. In Toronto, it's even more. It's almost $295,000. And that's because there's a lot of high transaction costs in Toronto. And how much are houses in those cities? So in Vancouver, the average home price would get to $1.3 million and very close to that in Toronto. Wow. Okay.

And then something interesting happened with the math that I did. So I got that in Victoria, the average home price would cross the $1 million threshold, just barely. And in Hamilton, prices would remain just below the $1 million threshold on average. And as a result, if I do the math with the sort of what would you need in terms of minimum down payment and minimum household income to get a mortgage. You get that in Victoria to get, you know, the average home that's now valued at just over a million, you'd need to come up with almost $230,000 in down payment. And you'd need around $190,000 in household income. In Hamilton, because you're below 1 million, you would get away with a much smaller down payment.

Because in Canada, you need to put down at least 20% of the value of the home if it hits $1 million and above. But below $1 million, you can put down a smaller down payment. But on the other hand, they would need 230,000 in household income, much smaller down payment, but very high household income, because obviously your mortgage is going to be very, very large. Okay. And the shock was to find out that their household income in every single city I looked at would be short of what they would need. Like the minimum income that you need to rent a place on your own and save up for a down payment on an average price home is not enough to qualify for a mortgage on that home. We'll be back after this message.

So why is it that you need such a high income to get a mortgage today? So that has to do with higher interest rates. So with home prices as high as they are now, these increases in interest rates that we've seen this year have really made those mortgage payments that much larger. And so it's, you sometimes hear from older homeowners who say, you know, but back in my day, I was paying double digit interest rates, like I had maybe a 12% mortgage rate. And, you know, now interest rates are, you know, for fixed rate mortgage, I think they're around, you know, for 5%, really more 5 than 4. But with home prices

so high, a 5% mortgage gets you a very large mortgage payment. And in order to make those monthly mortgage payments, you need a very high income. There's also the issue of clearing the mortgage stress dust. So the stress dust is basically looks at your finances, and it's meant to ensure that you would be okay with the amount of money that you're borrowing on that home, even if interest rates were quite a bit higher than the interest rate that the bank is offering you. What was the most affordable city of all the cities that you looked at? What was the most affordable place to live? So Ottawa, Montreal and Calgary stand out. In Ottawa, things look pretty good, not so much because of the, you know, how much homes or prices or rent costs, but because of incomes. Incomes are higher in Ottawa? Incomes are higher

in Ottawa. So and that's incomes for 25 to 29 year olds with a university degree and a full time job. And when I was chatting about these numbers with an economist who lives in Ottawa and he often hires young people in Ottawa, he said that those numbers made perfect sense to him because it's a very competitive market for young people, the labor market in Ottawa. lot of well-paying government jobs that tend to pay a pretty good salary right away from an entry level point. And so even though housing is becoming more expensive, so far incomes are holding up pretty well in Ottawa. And Calgary, I would say, takes the cake in terms of affordability. It still has pretty strong incomes, but housing is quite affordable, both for buying a home and for renting. It's interesting because in Toronto on the transit, there's lots of ads for Alberta, actually, advertising the fact that you can actually afford a house in that province. So this is a really interesting thing that it actually checks out based on your math there.

Yes, absolutely. I heard those ads on the radio and I was like, that resonates. We also did an informal poll on Twitter, Erica, and we asked, how many years did it take you to get financially set up for adulthood? And if you're still working on it, how long do you anticipate it actually taking? 44% said it would take 10 years or more than 10 years to get set up, which seems like a long time. What have you learned about how people make that phase, that in-between phase work for them? So people are getting roommates. The census showed that 15% of people in their 20s and early 30s were living with roommates. And it was the highest growing living arrangement for that age range. And I spoke with a teacher who has a university degree and a master's degree who is now living in Halifax. And she's 34. And she just went back to having a roommate at 34, which she says is a great move financially.

She said for the first time, I can save and I'm not worried about bills. But it's not where she thought she would be at 34. And she did tell me like it feels like this launching phase is lasting forever. And then I found I spoke to a 69 year old father in Ontario, who had his son and his daughter in law, and they just had a baby. And they'd been living with him for three years, and they just moved out. And so that's an example of, you know, people living with their parents. And he was extremely supportive. And that's one of the heartwarming surprises of reporting this story that I spoke to some older parents that absolutely get the issue and what's

going on and how hard it is for young people to afford, you know, to live on their own. And they're absolutely supportive. And they're like, they can stay and work and save at home for as long as they need to. They don't have to pay rent and there's no timeline. It's interesting. We heard from people too that said they're in this situation. Nomi wrote to us and said that they were afraid of, quote, never being able to move out of my childhood bedroom, end quote. And so it is nice, you know, for people that do have that option, you know, maybe not an ideal situation to live with your parents, but it is an option. What about people who maybe don't have that, Erica,

they don't get an inheritance, or they don't have parents, family members that they can move in with, what can they do? So that's one of the most serious issues that my reporting sort of highlighted is these high rents are an added pressure on top of student loans for lower income students. And the pressure is for these students to get the jobs that pay the bills. And a lot of the time, the risk is that, you know, say someone who, again, who's been waiting tables since they're, you know, they were a teenager. By the time, say, they're done with their undergrad, they have quite a bit of experience,

they can easily get a, you know, a well paying waiting job, you know, in a high end restaurant, or what have you. And that job will pay the bills that they have. And the entry level jobs that they can get in their own field will not. And then you have this tremendous pressure to keep that those higher paying jobs in, in retail, or, you know, in a restaurant or whatever, where you've done, you know, you've advanced a little bit, and not get those lower paying jobs, you know, that would open the door to a career that would in the long run, get you to, you know, a much higher earnings. This is actually a really important point, because if you are, if you're a younger person who has financial stability, either because your family can support that, or you can get,

you know, help in other ways, then you can actually get into that career, maybe, or more easily get into that career that eventually would get you that high paying job. Whereas if you don't, that might be a lot more difficult. Yeah. And this has been an issue. Some economists call it wage scarring. It's been an issue that people have highlighted when it comes to student debt for a very long time. But now these housing costs, especially high rents, add to that pressure. And there's also the question of who gets to have, you know, high paying professional jobs in big cities? Is it just the 20 year olds who can be bankrolled by their family, who can afford to have these jobs and everyone else has to move out? Because yes, you know, we have hybrid work, we have remote work, but there's probably still, you know,

opportunities that are tied to, you know, big city jobs where you have to be in person, where you have to be networking in person. And are those opportunities now increasingly going only to the kids who can be kept afloat financially for a number of years by their families? Yeah. Erica, thank you so much for taking the time to speak with me today and help explain this. Thank you. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show.

Kasia Mihailovic is our senior producer, and I'll talk to you next week.