This article is part of Global News’s Home School series, which gives Canadians the basics they need to know about the housing market that they never learned in school.
First-time homebuyers might find themselves a bit overwhelmed hopping online to search all the available properties on the market.
Listings vary widely from neighbourhood to neighbourhood, and without answers to a few key questions hammered out, it’s easy to get lost in the real estate sea.
Do we need three bedrooms, or are we fine with two? Condo or detached? Should we live closer to friends, work or family? And perhaps, most importantly — can we even afford any of this?
While everyone’s first rung on the property ladder looks a bit different, a starter home marks the entry point for prospective buyers to break into the housing market and gives a little bit of room to grow before typically jumping up to a bigger home when the time is right and your needs have changed.
In that way, buying a starter home is never just about the now — it’s about where you’re going.
Here’s what real estate experts have to say about the search for a starter home in the modern market.
'Budget is the driver'
Nick Kyte, real estate agent with Coldwell Banker First Ottawa Realty, says the first step when he sits down with someone looking to break into the housing market is to set expectations.
Most Canadians are first exposed to the housing market through their childhood home or, more recently, through the lens and filters of real estate television shows. Kyte tells Global News that can disillusion some buyers about what’s realistic for their first property.
“HGTV definitely plays a role in what people think they can get, what they want, and that everyone wants everything instantly,” he says.
Before heading out to see homes, Kyte says first-time buyers should have a mortgage pre-approval in hand from a broker or lender — not just a quick online calculation for what they should be able to afford — so they know exactly what their maximum budget is. At that point, an agent can show you what recently sold in your budget around the areas you’re looking to see if your initial thoughts were realistic, or if you might have to recalibrate.
“Budget is the driver in terms of what properties you can get into and what properties you can’t,” Kyte says.
For many people, this is where the conversation gets tense. Affordability in Canada’s housing market — even for starter homes — can be hard to come by.
Real estate outlet Point2 gauged starter home affordability across 50 Canadian markets in a report this week by looking at whether the average renter’s income was enough to buy a property valued at half the city’s benchmark price.
Results were bleak for renters living in 36 of Canada’s 50 biggest cities, particularly in Ontario. An average renter living in Toronto, for example, earns just over $70,000 annually, putting them 46 per cent short of the income they’d need to afford a starter home in the metropolis, according to Point2’s analysis.
Of course, that leaves 14 cities where an average renter is well-positioned to break into the market, including Edmonton, Calgary, Winnipeg and multiple municipalities in Quebec. Additionally, dealing strictly in averages means any particular buyer or any market could still have a path to affordability — even as those paths seem to be narrowing.
“Affordability is getting tougher; it’s more difficult for first-time buyers,” says Toronto Realtor Sophie Chen, who is with Keller Williams Empowered Realty.
Chen tells Global News it’s increasingly common to not just see couples pooling their money together in order to break into the housing market but for extended families to contribute to help secure the first purchase.
A Royal LePage report released on Thursday shows that more than a third of first-time buyers in the past two years relied on financial support from their families to make the purchase. The survey also showed that Canadians are waiting longer and are older when they buy that first property.
But for those who have been saving for a while and might feel close to breaking into the market, Chen says the current higher interest rates and modest price depreciation from the pandemic-era highs make it a good time to secure a starter home in even the more traditionally expensive markets.
“If they are able to find something that meets their needs, it’s a good opportunity,” she says.
Room to grow
In terms of affordability, a condo unit is a common entry point for many breaking into the market, Kyte says, especially for those who are keen to maintain a downtown lifestyle.
But he also cautions would-be buyers from narrowing their focus on the condo market just because they think it’s all they can afford.
Kyte says he’s had clients who were dead-set on a downtown apartment and come to him with a list of their top condos to check out.
“We go see those condos, and it’s not for them. It’s too small. There’s some noise going on. They didn’t like how long it took for the elevator to go there — just for numerous reasons, it just did not fit their needs,” he says.
Instead, he encouraged them to shift their perspective to the outskirts of Ottawa, where he found a townhouse in their price range. Instead of staying in the condo for three to five years, as the buyers had originally anticipated, they’re now gearing up for a seven-to-10-year stay with room to grow their fledgling family.
That three-to-five-year mark is a typical lifespan for a starter home, Kyte notes, though circumstances like those he just described change that and make for shorter or longer stays.
Finding a starter home with a bit more space to accommodate family growth can be great for building equity, he adds, letting your home rise in value for longer so that your next jump up the property ladder can be to an even better property.
Chen says planning to stay for too short a timeframe can also backfire.
Take, for instance, the past year on the housing market, which has seen property values decline by varying degrees in many cities across Canada.
If you had purchased a year ago with ideas to sell today, you might not have built up any equity at all and could even sell for a loss if you stick to your original plan, Chen says.
“You might want to stay longer to make sure you can not only break even, but make a substantial amount of equity in your home before you move out.”
Balancing affordability and risks
Downturns in the market can also backfire on buyers of new builds like condo high-rises that are common around the Greater Toronto Area, warns Chen.
Some builders have faced lengthy construction delays and difficulty securing financing to proceed with condo projects as market conditions have tightened in recent months, she says.
Beyond the uncertainty of when you’ll get into your home, buyers who put money down on a new build may not qualify for the same mortgage amount as they did a year ago when interest rates were lower, Chen says. And after the market correction, your lender might not appraise the property at the same value as it had previously, which could leave you short on funds to close, she adds.
While there can be affordability in securing the price for a pre-built unit a year before it’s built, Chen warns that for these reasons, it’s “higher risk” than finding an existing unit on the resale market for your first home.
In addition to looking at condos and new builds or outskirts of your desired market, another way to get an affordable starter home with a bit of space is to look for a fixer-upper.
Competition will be tightest for “ready-to-go” homes, Kyte says, but a home that requires even “cosmetic fixes” or has an unfinished basement could represent an opportunity for a handy homeowner or someone with family or friends experienced in contracting to add some quick equity to a lower-valued home.
If you’re looking at a fixer-upper, get quotes or a rough estimate from professionals about what the changes you have in mind might cost you and divide that over the length of time you expect to live in the home to work out an annual budget, Kyte says.
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He adds that you ought to speak to your real estate agent as well about whether the improvements you’re eyeing would add as much value to your home as you expect — not every market is right for a granny flat, for example, and your 10-foot-tall luxury rainforest shower might not have as broad appeal it does to you.
Be wary, as well, of the differences between a fixer-upper and a home with fundamental problems.
Kyte leans back on a familiar phrase you might’ve heard on an HGTV renovation show or two — make sure the house has “good bones,” he says.
This means getting an inspection — if conditions are in the cards for the market — and making sure the home’s foundations, roof, heating and plumbing don’t have glaring issues that will turn into a money pit for an unlucky owner.
“Basically, the major components of the home are in good order,” Kyte says. “That’s what good bones means to me.”
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