Home buyers trying to move up from their entry-level dwellings face a form of gridlock in the red hot markets of Toronto and Vancouver that risk confining them to condos, TD Bank says.
In a commentary released Friday, Beata Caranci said buyer's gridlock refers to existing homeowners who are trying to move up from their entry-level home to the "trade up" segment but face a tight supply of options they can afford.
Even though buyers acquire entry-level homes with the intention of eventually "trading up," strong price appreciation now means taking on a big mortgage or eating into savings, TD said, adding that people trying to sell their entry-level homes have not seen the price appreciation relative to what homeowners in the trade-up segment have enjoyed.
"Taking into account other costs associated with selling, financially it makes more sense to stay put and/or renovate," said Caranci. "If this sounds familiar, you have a case of buyer's gridlock."
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Meanwhile, Millennials, who have been the focus of much of the attention in the hot housing markets as they face being priced out, absorb the trickle-down effect of buyer gridlock.
"It limits their options available for purchase," said Caranci. That means anyone who was able to stretch themselves to get into that starter home and start climbing the ladder may be stuck there longer than they planned. "After making the plunge, it can prevent a move to the next step."
The gridlock that existing homeowners face can be exacerbated when they elect to stay put and renovate their entry-level homes.
'Financially it makes more sense to stay put and/or renovate' - TD Bank economist Beata Caranci
Renovation activity in detached home market has shot up because of their flexibility over condos when it comes to permits and expansion.
"The end result is that a home conversion can take what was once considered an entry-level detached residence into the category of a trade-up, further tightening the available and affordable supply at the lower end of the market," said Caranci.
TD said the supply of new homes in the Toronto and Vancouver areas remains greatest in the condo market, although its sees the square-footage for the average unit shrinking, making them not as family-friendly.
Demand for detached homes has sent would-be buyers out to the suburbs of the large metropolitan areas, inflating prices in those regions.
"Ultimately, Toronto and Vancouver are moving the way of many international cities, where land constraints and population growth forces residents out and up," she said. "Out into suburbs and up into condominiums, be it ownership or rental."