It appears a growing number of millennials are entering the housing market with their eyes closed.
According to a new survey by Angus Reid for online real estate marketplace Nobul, a third of millennials said housing prices are affordable in the area they plan to live in.
But the numbers tell a different story. The average millennial’s after-tax household income is $44,093 a year, yet the national average price for a bungalow is $521,250. Even if the buyer comes up with a 20 per cent downpayment of $104,500 — monthly mortgage payments of $2,205 on a 20-year fixed-rate mortgage at 2.49 per cent will eat up around half of their income. That doesn’t include property tax and other expenses.
The survey also found 75 per cent of millennial homeowners chose the first realtor they met. The average millennial though puts more effort into deciding what to watch — browsing 10 to 20 titles on Netflix before making a final decision. That’s particularly problematic because 38 per cent know nothing, or very little, about average commission rates for realtors.
“Part of the reason millennials don’t fully understand the costs involved in purchasing a home is due to the overwhelming amount of misinformation available,” Nobul CEO Regan McGee told Yahoo Finance Canada.
McGee suggests seeking reliable sources for credible information.
“Almost all of the people that they might speak with have conflicts of interest. They should try to educate themselves as much as possible and remember that there is very little correlation between the fees that they’re paying and the value that they are receiving,” he said.
“Millennials should not necessarily look to their local real estate board, national real estate association and/or finance companies for objective, unbiased information. They all have their biases based on their own vested interests.”
There are a number of costs that need to be factored into the decision to buy a home. Unless you plan to go at it alone, there are realtor fees to considers. There are also legal fees, a land transfer tax, and property taxes once you move in, so it’s important to have a plan before making the leap into homeownership.
“Millennials should be clear on the full cost of the entire process before they start shopping for a home, including budgeting for ‘unexpected’ costs and having a clear understanding of commission fees,” said McGee.
“Taking their lifestyle into account is also a huge part of the process, so it’s important to be honest with yourself about your spending habits. Buying a home is part investment, part consumption.”
A change of heart has consequences
A lack of planning and education can have huge financial consequences if you jump into homeownership, but get cold feet. For example, if you put down a deposit on a home but back out of the purchase, the buyer will be in breach of contract.
“The deposit is forfeitable to the vendor and there may be damages in addition to the loss of deposit. The primary damage is if the vendor resells the home to a third party for less than to the original young buyer,” Gabriel Krikunez, real estate lawyer at GK Law, told Yahoo Finance Canada.
“The original young buyer is liable for the difference in price [less the deposit forfeited].”
It might be tempting to put down a deposit on a new build that won’t be ready for a couple of years, assuming you’ll be able to secure a mortgage as you advance in your career. But if you can’t when it’s time to start moving in, you’re in trouble.
“If the agreement is firm, then their inability to secure a mortgage has no bearing to the end result. A lot of people think “it’s not my fault, cause the bank won’t give me the money,” said Krikunez.
“That is flawed logic. The vendor [in a typical deal] is ill-concerned about whether your purchase money comes from the Royal Bank or the bank of mom and dad. If the purchaser is unable to close the deal [assuming due of the lack of mortgage financing], then they are in a breach of contract.”
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.