Here's what it takes to afford to buy a home in Vancouver

What exactly does it take to afford to buy a home in Vancouver?

Affordability is such a hot topic in Vancouver right now, one that affects everyone in the city. But we’re sick of repeating the same old stories about rising house prices. We don’t just want to keep telling you that it’s happening, we want to find out why it’s happening and what can be done to tackle it.

Vancouver Affordability Series

Part 1: How Vancouver got so expensive and what you can do about it
Part 2: Why are wages so low in Vancouver compared to other cities?
Part 3: Is Vancouver in the midst of a real estate bubble? Will it burst?
Part 4: Opinion: Why I chose to move to Vancouver
Part 5: Land-locked region: Is geography a factor in Vancouver’s affordability crisis?
Part 6: What exactly does it take to afford to buy a home in Vancouver?

With talk about Vancouver’s real estate market swirling daily, the facts on what it takes to purchase a home may seem confusing. Foreign investment, shadow flipping, and a lack of supply are driving prices upwards, and many young Vancouverites are unsure of whether they’ll ever be able to enter the market.

So what does it really take to save for a down payment? How much money do you need to be earning? What are some other factors you need to consider? Is it even worth it? We’re attempting to break down some of the barriers and clarify just what it takes to buy a home in the city.

Saving for a downpayment

SEE ALSO: BC government to provide up to $37,500 loan to help first-time homebuyers

Being able to save for a downpayment on a home starts with the basics: getting a handle on your budget. Vancity Credit Union Financial Planner Sophie Salcito tells Daily Hive the first thing you need to do is determine how much money you’re able to save from each paycheque.

“I usually encourage clients to save a certain percentage if they can, whether it’s 10% or 15%, and set up an auto-debit so it’s coming right off your paycheque and it’s going right into a savings pot for you,” she says.

Day-to-day items like coffees and buying your lunch add up over time as well. It’s money wasted that could go directly toward your down payment – after all, every penny counts, even when saving for a down payment of $30,000 or more.

Plus, says Salcito, a little positive reinforcement never hurt anyone.

“Don’t get swayed by these stories of ‘I’m never going to be able to afford this,’ it just gets you in a negative mindset,” she says. “You just need to cut out the noise, decide ‘I want to own something and I’m going to work towards that,’ and then what you’re probably going to need to adjust are your priorities.”

Changing expectations

Salcito says people tend to have wild expectations about what their first homes should look like, and many times, they need to lower them just a touch to be able to enter into the market. Buying an older condo in a central part of town might be preferable over a nicer place outside of the city, depending on your priorities. For a first home, Salcito says it’s usually a choice between location or finishes – you can’t have both.

If at all possible, asking a family member for an interest-free loan might be a necessary course of action, too, given how difficult buying a home is now.

“That’s what I needed to do when I bought my first place. I borrowed $3,000 and I needed that little chunk to get me in and I paid it back. So that’s very common, I see that a lot with my clients – they’re the ones with the pots of money that they’re giving to their children, so I see the assets being sold to provide – if they’re able to – help.”

In the end, while trying to save for a downpayment on a home, there’s one piece of advice Salcito says is invaluable: short term pain means long-term gain – that is, what you give up now to put away a few bucks will benefit you in the long run.

“You’re going to have to be prepared for the hard work early on, but I can tell you the benefit is so great later on when you own your first property or you’re ahead of the game because you missed a few trips to Mexico that your friends were going on.”

How much money do you need to be earning to afford a mortgage in Vancouver?

Contrary to what you might think, there’s no base salary that qualifies a person for a mortgage in the city – a number of factors come into play, however, including strata fees and property taxes, that, along with your monthly mortgage payment, shouldn’t exceed 35% of your gross monthly income.

“When we’re assessing someone for qualification for a mortgage, we need to also consider other things associated with their financial profile such as their debts,” mortgage specialist Jonthan Fung tells Daily Hive. “If someone has, say, credit card balances, student loans, or lines of credit, we also like to factor in those payments as well.”

All of those debts combined with your monthly house payments shouldn’t exceed a total of 42% of your monthly gross income, says Fung.

Other things need to be considered as well – if you like to eat out frequently or spend your money in other ways, you’ll need to adjust your mortgage accordingly. And if you don’t follow the guidelines that are generally accepted by most institutions, even if it seems like you can afford it now, things could change in the future.

“Lets just say interest rates were to go up – their mortgage payment could potentially go up because of that. All of a sudden, if they’re already at or above the limit, and their payment jumps up, that could push them a little further beyond that limit, putting them in a situation where potentially there could be challenges meeting your monthly obligations,” says Fung.

In addition to the monthly mortgage payment, you must put at least 5% down if your home costs under $500,000. For a condo that costs around $200,000, that’s a $10,000 minimum downpayment. For a home above the $500,000 threshold, you must put down at least 10% – so $50,000 or more.

A bleak outlook for Vancouver millennials?

While many tips and tricks exist to save up for a downpayment for a house, how realistic is entering Vancouver’s housing market for millennials? A recently released report from Vancity Credit Union suggests young people in Vancouver have the least purchasing power in the entire nation.

In fact, millennials who purchase a home at an average price in Vancouver can expect to go into debt by nearly $3,000 a year thanks to an imbalance in property values and salaries.

“The status quo isn’t good enough if we want this generation to be able to put down roots, possibly have a family and still enjoy a basic quality of life in Vancouver and Victoria,” says Vancity’s vice-president of community investment, William Azaroff, in a release.

And while you can save for a downpayment by eliminating those daily mochas and going out for dinner less frequently, it may take you up to 23 years. Generation Squeeze, a lobby group for young Canadians, released a report that looks at the change in average home prices and earnings across Canada, and Metro Vancouver had the most depressing outlook.

“It used to take five years for a typical young Canadian to save a 20% downpayment on an average home,” says Dr. Paul Kershaw, the study’s first author and a UBC professor, in a release.

Make sure you’re buying a home for the right reasons

Before you even step foot into the office of your mortgage specialist, it’s important to determine if you’re trying to buy a home for the right reasons. With the potential volatility of Vancouver’s housing market – the Bank of Canada recently said the city’s growth might be unsustainable – some financial planners say to look elsewhere to grow your bank account.

“One of the things I ask is my clients is ‘are you buying this as a home or as an investment?'” Independent financial planner Bradley Bumstead tells Daily Hive. “For me, there’s a huge difference between the two, and generally that comes with the amount of time you’re going to spend in that place.”

Bumstead says it makes sense to purchase property if you have no plans to leave – that is, if you’re staying for five to 10 years in the same spot. That way, it doesn’t really matter what the market is going to do in the short term. On the flip side, if you’re buying property as an investment, there are many moving parts to consider.

“As an investor, you can invest your money pretty much anywhere you want in the world, with some exceptions, and so many people feel they’re honed into Vancouver and don’t look outside of that, and so that’s really what I encourage people to think of.”

To be clear, Bumstead doesn’t think investing in Vancouver’s real estate sector is unsafe per se, he just believes there’s more to consider than people may initially realize. Cashflow is a major thing that people need to keep in mind when investing in property – most real estate investors won’t even look at a property unless it has a cap rate of at least 7%.

“If I put $100,000 into a property, I would expect to get $7,000 a year profit out of that,” Bumstead explains. “In Vancouver, that’s not necessarily the case.”

Here in Vancouver, it’s not uncommon to see lower cap rates of 2% to 3%, he says, so the other side of the equation is to buy a house to accumulate capital.

As for his own predictions for Vancouver’s housing market, Bumstead says it’s impossible to tell if the upward trend will continue, but we’re to believe it will due to our “recency bias.”

“Human beings have a tendency to take trends in the past and project them out into the future, which allows us to plan for the future, but that’s also dangerous because people tend to think that what happened in the last 10 years will happen in the next 10 years, but that’s not necessarily the case.”

In the end, your priorities are what matters – and Bumstead says many of his millennial clients tend to value experiences over investments, so they’re not willing to sacrifice that for material goods.

“Some people want to stay at home and that’s what they want to do – they like hanging at home, they like to decorate the house – then it’s probably a good investment for them.”

“In reality, I ask people, ‘what is the downpayment that you need and can you save that and is it going to sacrifice all the other wants and needs that you have?'”