Where Do Canadian Homebuyers Stand?

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It’s a weird ride so far for Canadian homebuyers. Outside investments, income that is not rising the way they wish, and the mortgage stress test all affecting their big plans for a home of their own.

There are three things strongly in their minds when they think of investing in real estate:

1) The fear of missing out

2) The perceived impact of foreign investors

3) Expectations of future price growth.

As far as we know, these are the conclusions from CMHC’s recent ‘Housing Market Insight’ report, which surveyed 30,000 recent homebuyers in Vancouver, Toronto and Montreal.

Despite data from Statistics Canada suggesting non-resident home ownership at 4.8 percent in Vancouver and 3.4 percent in Toronto, close to 2/3 of Vancouver respondents and almost half of Toronto respondents believe foreign buyers are having “a lot of influence” in their respective markets and are to blame for rising home prices. In Montreal, 42% of homebuyers feel this way.

“What is striking is the significant gap between perceptions of the public and available data, so much so that the perception of non-resident ownership takes centre stage when discussing the drivers of price growth,” the report noted.

Guillaume Neault of CMHC said, “As we can see, psychological drivers can be at odds with economic fundamental drivers.”

The survey suggests that a significant percentage of homebuyers in all three cities spent more than they budgeted. 48% of the buyers in Vancouver and Toronto blew past their budget, while 24% of Montreal homebuyers spent more than they planned for.

What strikes us even more is that CMHC said the figures were similar for both first-time and repeat buyers and suggests that the “fear of missing out” drove many buyers to exceed their budgets.

“Buying sooner than expected may reflect a lack of information about the market, thereby pushing up the initial budget for fear of missing out in a market where prices rise,” the report emphasized. “Buying later than expected may reflect the inability to buy at the desired price, which would inevitably require buyers to revise their budget in an upward fashion.”

The survey also went into the issue of bidding wars, which it noted are common in tight markets.

In Toronto and Vancouver, 55% of buyers reported being involved in a bidding war, compared with just 17% of buyers in Montreal.

Single-detached homebuyers involved in bidding wars ended up paying a premium of about 20% in Toronto ($125,000) and 10% in Montreal ($55,000), according to the survey results.

Interestingly, in Vancouver those involved in bidding wars typically paid 15% less ($200,000) than the median price. CMHC explained this as being due to the bulk of bidding wars taking place in segments of the market where prices were below the median.

“…those who experienced a bidding war and highly value future growth have higher short-term price expectations than respondents who did not report participating in a bidding war,” the report noted. “This would suggest buyers rationalize their purchase because of expected future growth.”

The real estate market in Canada is fascinating. It’s important to do your research well and speak to as many in the industry as possible. More money than necessary is being wasted due to misinformation, on houses that may disappoint some of the homebuyers. What are your thoughts?