While governments across Canada focus on providing badly needed help to first-time home buyers, they are failing to see the hurdles facing aspiring second-time home buyers.
The second-time homebuyer problem describes the situation of a family that has outgrown their first home, but is unable to move into something larger.
The typical profile of these trapped first-time homebuyers is that of a middle-class couple, in their late 20s to early 40s, who either have or would like to have children.
They bought a small home some time in the past 10 years, with plans to live in it for a while, build equity, and then sell when the time was right. Unfortunately for them, those economics no longer work, particularly in Southern Ontario and the Lower Mainland of British Columbia.
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The Greater Toronto Area is a good example of how the game has changed. When home prices in the GTA started rising in the 2000s after a decade-long slump, that created a pathway for young, middle-class families to own a three-bedroom or larger home.
A young person, or couple, would purchase a one- or two-bedroom high-rise condo unit. In the early 2000s, average Toronto condo prices were under $200,000, so a down payment of $10,000 was sufficient. For many workers starting a career – it was tough but still doable.
The owners of the condo unit would make their monthly payments, and their property would appreciate over time, with some years showing increases of more than 10 per cent. Even a 30-per-cent increase in the home’s value over five years would create $60,000 in equity.
Add the initial $10,000 down payment and the regular mortgage payments, the owners were often left with a home worth $100,000 or more than the remaining balance on their mortgage. They could then sell the condo and use that $100,000 as a down payment on a home with three or four bedrooms, creating a comfortable place to raise children.
While flipping a condo for something larger after a few years was a model that worked for some first-time buyers, it was never economically or socially sustainable. It required condo prices to rise, and with family-sized home prices also rising quickly, even a six-figure gain could not guarantee a larger home, at least in the GTA.
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As home prices continued to rise in 2015 and 2016, the federal government recognized that the situation was spiralling out of control. In response, it implemented a series of measures, including increased down payments for homes priced over $500,000, and the introduction of a mortgage stress test to ensure borrowers could afford their payments if interest rates went up.
These changes had the intended effect; home price growth cooled in the GTA. It also had a number of unintended consequences, the most notable being that young families who could no longer qualify for a mortgage on a family-sized home in the GTA began to move to smaller markets outside the region, such as Brantford, Woodstock, and London. That, in turn, caused home prices to skyrocket in traditionally affordable markets.
These changes have had a dramatic effect on both home buying and homebuilding in the GTA. Between the 2016 and 2021 census, the GTA’s population of adults aged 25 to 44 grew by over 125,000 people, and the number of condos owned as a primary residence by this age group rose by roughly 15,000.
However, the number of homes of other types that this group owned and lived in fell by more than 26,000 over those five years.
The end result? Owning a family-sized home became out of reach for most young couples in the GTA.
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Today, our cities have a large cohort of young first-time homebuyers who are trapped, having no way to move up into family-sized homes.
Governments can help. The most immediate thing they can do is extend the HST waiver on new homes to all buyers – not just first-time ones – who intend to use the home as their primary residence.
Joint federal-provincial initiatives would reduce the cost of a newly built home by up to 15 per cent, depending on the province. They would also free up more family-sized homes, making it easier for seniors to downsize.
All levels of government should be trying to reduce the cost of building new homes, examining everything from development charges to zoning to building codes. The stress test should be reviewed and refined to encourage the construction of new homes while avoiding price escalations for existing ones. Our land-use policies must be aligned with our immigration targets to ensure sufficient development land to support a growing population.
None of these changes, however, will happen if governments fail to consider the dilemma facing second-time homebuyers.
Mike Moffatt is the founding director of the Missing Middle Initiative and co-host of the Missing Middle podcast.
