The idea of a starter home may be a thing of the past in Toronto and Vancouver, as an increasing number of homeowners looking to "trade up" are finding themselves priced out of the market, according to a new report from the TD Bank Group.
Chief Economist Beata Caranci says homeowners in Canada's two hottest housing markets are faced with "buyer's gridlock" after purchasing entry-level homes and later discovering that upgrading to a larger property is difficult.
"Despite a strong appreciation in the price of your home, trading up still requires a hefty mortgage or reduction in savings. In doing so, you鈥檒l likely receive only a modestly better home or neighbourhood," Caranci writes in the report released Monday.
She said, taking into account other costs associated with selling, such as real estate and lawyer fees and land transfer tax, it may often make more financial sense to stay put or renovate your home.
In the study, Caranci used condos to represent the entry-level market. On average, it costs twice as much to purchase a detached home than a condo in the GTA market.
In the Greater Vancouver Area, the price gap has widened to three times as much.
But she notes that the gap between condos and detached homes in these markets could begin to close.
"The potential for the detached market to continue to accelerate at the speed we鈥檙e seeing is pretty limited," Caranci told CTVNews.ca. "It's just going to crowd out, it will push buyers out of the market. So the risk is you start to see your condo market prices start to catch up."
She said, while the construction of larger, more family-oriented condos could be an answer to the low availability of detached homes, on average, condo sizes in these markets are decreasing.
More families may be faced with condo living
Caranci said Toronto and Vancouver may be moving in the same direction as a number of European cities, where land constraints force homebuyers out of the core and into surrounding communities, or out of houses into condo and apartment buildings.
"It's much more common, if you're in Europe in particular, for families to live in apartment buildings and not have detached homes," she said. "So this may be the direction these markets are going.
"But you do need to build supply into that market, where people truly feel like it's a family home.鈥�
Higher home prices in these markets are affecting surrounding suburbs too, Caranci noted, where similar price growth is taking place in the detached house market.
In the Vancouver suburb of Burnaby, for example, the price of a detached home has gone up 60 per cent over the last five years.
In York Region, located just north of Toronto, detached homes have jumped 40 per cent in price over the last four years.
The report noted that buyer's gridlock is becoming worse as more homeowners opt to renovate their entry-level homes rather than purchasing a larger home.
Housing market down-cycle won't have huge impact on prices
Caranci said those waiting for the markets to cool before purchasing a house in Vancouver or Toronto may be out of luck.
"There's a lot of demand for those detached homes," she said. "So when you look at the 2008 (recession) prices came down in both markets鈥ut not in any significant degree."
She said, because there's such a limited supply of detached homes and a constraint on available land in these communities, "there's going to be a natural premium that's being put on those homes."
Caranci said, if the home-buying process in Toronto and Vancouver was played out on a Monopoly board, Baltic Avenue, once considered one of the most affordable, is now fetching the price of St. James Place.
In the GTA, "there are fewer buying opportunities until you cross Kentucky Avenue, and for Vancouver homeowners, it鈥檚 more like Pacific Avenue," she writes.
