Generations Apart – Housing Affordability Then and Now

Affordability has long been a challenge in the BC housing market, but the super-charged market that prevailed during the pandemic and the subsequent rise in interest rates to tame inflation have only amplified those challenges. Consequently, affordability for younger first-time homebuyers has never been so difficult.

Now, that claim might prompt some inter-generational debate from Baby Boomers who had to deal with record-high mortgage rates. Indeed, the scar tissue from 20% mortgage rates is very deep – just try lamenting the current level of mortgage rates to anyone in their 60s. Within a microsecond you will be told of an 18% mortgage rate on their first home. And they are right! If you were between the ages of 25-40 in the 1980s, the average prevailing mortgage rate was a staggering 12.3% and peaked at over 21%!

MORTGAGE RATES BY GENERATION

(Shaded area represents the midpoint of when an individual of that generation is aged 25-40)

However, as bad as affordability was in the early 1980s, entering the market now as a young person is undeniably more difficult. While mortgage rates have not soared back to 20%, Millennials are the first homebuyers in close to 40 years to face a sustained rise in the cost of borrowing and are the first to be subjected to much stricter qualifying criteria in the form of the mortgage stress test. An average mortgage payment (assuming a 20% down payment and a 25-year amortization) in 2019 in the Fraser Valley was about $2,700 per month. Just 4 years later, after a jump in home prices and the highest mortgage rates in over 15 years, that calculation results in an average monthly mortgage payment that is 80% higher at more than $4,900 per month. For a dual-income household of 25-34 year-olds, that means an average mortgage payment has spiked to nearly 70% of a young couple’s income, exceeding the previous nadir for affordability reached in 1981.

WORST AFFORDABILITY IN 40 YEARS FOR YOUNG PEOPLE

Average mortgage payment, as a proportion of dual income 25-34 year old household, British Columbia

Thankfully, mortgage rates have fallen significantly to start the year as markets anticipate forthcoming Bank of Canada rate cuts. However, the benchmark 5-year fixed mortgage rate is likely to settle in a range of 4.5-5% over the next 5 years, much higher than the average 3% rate that has prevailed for the past decade. While government policy is currently very aggressively targeted at bringing new supply to the market, those measures will take some time to bend affordability back to pre-pandemic levels.

For real estate agents engaging with younger clients, affordability over the next 5 years is unlikely to meaningfully improve. However, given the massive size of the Millennial generation, demand for home ownership is not likely to fade. Consequently, helping the current generation of homebuyers succeed in making their dream of home ownership come true will require a greater weight on ensuring that buyers are pre-qualified and can pass the mortgage stress test, a perhaps narrower scope of homes and areas that young homebuyers can afford and likely far more reliance on intergenerational wealth transfers to meet down payment requirements.