The current state of the real estate market has seen many Canadians facing financial exhaustion and depleting their savings trying to buy homes for the first time.
Average house prices have skyrocketed across the country this year, and at the time being, they don’t seem to be stopping. This has led many new homeowners to stretch themselves and their finances thin in an effort to meet the obligations that come along with homeownership. This often comes at the expense of their emergency savings, RRSPs, and long-term saving goals.
Emergency funds and long-term savings goals are incredibly important, so what can new homeowners do to get themselves back on track financially?
How To Get Back On Track
According to a recent report generated by the National Bank of Canada, home affordability in ten Canadian cities declined, for the fourth quarter in a row, in Q4 of 2021. According to the report, home affordability has deteriorated at the highest rate in more than 25 years in the last year alone.
I’ve found that the problem that the majority of new homeowners are facing is that in order to break into the housing market, they are overextending themselves and their budgets, often having to sacrifice their discretionary spending to pay their bills simply. This discretionary spending includes emergency savings funds, long-term savings, and retirement savings plans. They also have to wait longer to buy than any other generation in history.
In Canada in the 1950s, the average first-time homebuyer was in their early 20s. Today, the average first-time homebuyer is in their mid-40s before being financially comfortable enough to enter the housing market.
There have been numerous predictions stating that home prices will drop in the second half of 2022 in Canada, but as we’re only a month away from the second half of 2022, the market doesn’t seem to be slowing down. So, what can new homeowners do to get themselves and their finances back on track?
That is a great question and one I am more than happy to answer. Through my virtual practise in Edmonton, I have the privilege of working with millennials throughout the country to help them get their financials back on track. This means that I’ve witnessed firsthand, the financial strains that homeownership has put on my clients over the past several years. And, to be quite honest, rather than letting up, it’s just getting worse as time goes on.
Recently, I spoke with the Globe and Mail about the housing market crisis Canadians are facing.
“They’re exhausting all of their savings – including cash and the [assets from their registered retirement savings plans (RRSP) for the] Home Buyer’s Plan. Many of them are finding ways to maximize any value they have in those.”
One of the most important things to realize when buying a home is that the first two to five years of homeownership are going to be the most challenging for new homeowners. They’ve exhausted their savings after buying and while managing mortgages and other costs related to buying a house.
In order to help my clients get back on their feet after dealing with the struggles of buying a new home, I often suggest two things to them:
- Find new ways to boost their income.
- Set up a new emergency fund.
When meeting with my clients, the first thing I’ll do for them is build them a simple spending framework that outlines their expenses and goals. This helps both them and I get a sense of what my clients may be able to set aside for an emergency fund. The more I know, the better I’m able to help them.
I want to try and hit everything, but in what order do you want to allocate the available savings, and how can it be flexible?
Secondly, while boosting one’s income may seem like something that’s not particularly easy to do for the average person, what I’ve seen from the millennials that I work with is that they are starting to upskill – or learn additional skills – as a means of increasing their incomes. Anyone can upskill.
What Are Other CFPs and Financial Advisors Saying?
While I speak from the perspective of homeowners who’ve already purchased their homes, Anna Knight, a CFP with Simplicity Financial, based out of Mississauga, Ontario, told the Globe and Mail that ideally, she’d be helping clients before they purchase their homes.
“My first advice to new homeowners is always, ‘Don’t get yourself in over your head.’ And it’s hard right now because of where prices are,” Knight says.
However, for homeowners who’ve already bit the bullet and purchased their home, Knight went on to say that the next best solution is to put their priorities into rebuilding their emergency funds. Ideally, she said, homeowners should have at least six months of their fixed expenses saved in case of emergency. This includes mortgage payments, utilities, property taxes, and even food. She advises this so that in the case of an emergency, homeowners don’t have to use their credit cards, which will only serve to put them further in debt.
Once they’ve saved that six months for emergencies, Knight says she then tells her clients to allocate that same amount – whatever it was – to long-term savings, investments, and assets.
Asif Khan, a financial planner and senior wealth advisor with The Khan Brothers Wealth Advisory Group in Ontario, says that what he’s seeing is that first-time homebuyers have been stretching themselves so thin that there’s not a lot of budget left over. So he focuses on conversations that will help his clients figure out the next steps to take over the next one to five years.
The first step is to double-check that they are completely enrolled in any employer-sponsored pension plan. He also encourages clients to budget for a mortgage, life insurance, and disability protection.
“Eventually, as clients get older, they get promotions, start earning more, and then, hopefully, the budget starts to loosen up [to the point at which] they can save more aggressively later. But at least, at a minimum, get in that work plan and max [it] out,” Khan says in an article published by the Globe and Mail.
Of course, not everyone is offered workplace pension plans, so Khan advises setting up their own retirement plan. Even small monthly contributions add up, he says.
With no end in sight to the rising Canadian housing market, it may seem nearly impossible for those who want to become new homeowners. However, meeting with a certified financial planner or financial advisor before starting your home buying journey can give you the leg up you need to come out on top, despite the current real estate market.
You can contact me, Shyam Ganesh, at Grow Your Wealth Financial Planning, if you’re looking for home buying advice. I can set you up for success in the present as well as in the future.