Ruth Saldanha: In its latest statement in October, the Bank of Canada held rates. This is a small bit of relief for many Canadians who have mortgages and have been eyeing rising rates with some amounts of alarm. For those who may or may not own their homes but still want some exposure to real estate in their investment portfolios, fractional ownership of real estate may seem attractive. Is it though? Madeline Hume is a NEXT Senior Research Analyst with Morningstar Research Services, and she has been tracking fractional ownership. She is here today to talk about what she has found. Madeline, thanks so much for being here today.
Madeline Hume: Thanks for having me, Ruth.
How Does Buying Just a Part of a Home, Work?
Saldanha: So, let’s start by talking about what exactly is fractional ownership of real estate. How does it work?
Hume: Yeah. So, it means different things to different people. There’s no one definition that applies to all fractional real estate. It can mean even slightly different things in Canada versus the U.S., for example. Typically, what everybody agrees upon is that it is an ownership stake in a real estate investment that confers some sort of access or rights to the property, but there’s no standard definition for what those rights or access actually are. So, some businesses that build themselves as fractional real estate platforms are giving you a certain amount of time or unit of time spent on the property in a given year, like a time share. But what I’d like to talk with you about today is fractional real estate platforms that offer access to real estate properties as an investment vehicle.
So, what does that mean in practice? That means that investors are putting down a certain amount of money. It could be as low as $50 in some cases, quite a bit lower than a down payment. And in return, they’re expecting some distribution of income from rents of the property and the potential for capital gains when the property is ultimately sold.
Fractional Ownership of Homes Vs Single Stock ETFs
Saldanha: So, this sounds a little bit like a single stock ETF, but instead just for a single home or maybe for a building. Is that it?
Hume: It’s maybe the closest comparison that I could draw for investors that may not be able to get a handle on it, but I would say that there’s one crucial difference. Practically, all shares of Microsoft, for example, for a stock are created equal. If you sell one share, you know exactly what on the other end as an investor you’re buying. And you can exchange those like-for-like. But with real estate, no two properties are the same. They’re much more difficult to buy and sell because you need to find a buyer that’s interested in the unique property that there’s exposure to.
The Risks of Fractional Home Ownership
Saldanha: So, you touched a little bit upon some of this, but what are some of the risks of fractional ownership?
Hume: Yeah. So, the biggest one is liquidity. So, when you have the challenge of not having an asset that’s like-for-like with another investment, it means that when investors commit their money to a particular project, it can’t easily be withdrawn like a stock or an ETF can be sold. Either investors have to pay a penalty to liquidate their shares or sell it to another potential investor, which means they have to sell it for whatever the other investor thinks those shares are worth and that’s certainly up for debate.
What to Do For Exposure to Real Estate – Without Fractional Ownership?
Saldanha: So, assuming I’m an investor who wants some exposure to real estate but doesn’t have enough for a down payment or for an entire house, what are my options here?
Hume: Yes. So, there is one long outstanding option that many investors have successfully used since time immemorial, and that’s a real estate investment trust. It’s commonly known as a REIT. Essentially what it is, is it’s a share that invests in a basket of diversified properties. And because those shares are traded daily on exchanges and there is a certain amount of liquidity that’s expected for those vehicles, the properties that they’re invested in are not just diversified, so you’re getting exposure to multiple properties at once, but they also oftentimes are held to higher quality standards, lower leverage standards, things that protect investors when the markets start to get hit.
Saldanha: Great. Thank you so much for joining us today with your perspectives, Madeline.
Hume: Ruth, it’s been a pleasure talking with you.
Saldanha: For Morningstar, I’m Ruth Saldanha.
What do you think about when you picture the American Dream? For many, it includes marriage, kids, and buying a home with a white picket fence. But, not all of those elements are required for happiness or financial stability. For some people renting may make more sense for their financial situation versus homeownership. However, many may not see it this way. In this article, I will explore some of the reasons people think that home ownership is necessary and offer some ways to reframe negative thoughts toward renting.
Reasons People Think They Need To Own A Home
I had a conversation with a friend recently and she said, “I feel like I have to buy a house, but I really like the rent-controlled apartment I am renting.” I dug a little deeper to find that this friend believed that she was missing out on an investment opportunity and that everyone else was getting rich by investing in real estate.
There are a few reasons why people might think housing is a great investment:
- You can see it, touch it, feel it, and live in it.
- Housing can be an effective inflation hedge.
- Your friends and neighbors might talk about real estate more than other types of investments.
- The recent track record of residential real estate has been higher than average.
The last 10 years have been some of the highest for national housing prices, with an average annualized rate of return of 7.02% as of September 2023, according to the S&P Shiller-Case Housing Index. Robert Shiller, one of the economists involved in the Shiller-Case Index, found that most periods of time in housing are not like the last 10 years. Housing has kept pace with inflation for over 50-year periods, including 1890-1946.
Some people will make an argument that they can gain leverage when buying a home, making it an even better investment. Someone might be in a favorable position if they assume house prices will increase and if they could get a 0% down, low interest rate loan. However, many couples I see rush to pay their houses off and put significant down payments on homes, often due to negative feelings about carrying debt. Pure price appreciation of real estate is certainly not the only factor that determines whether real estate would be a good investment. Many people struggle to scrape up the cash to buy a first home or investment property.
Is Renting “Throwing Away Money”?
I hear investors say that renting is “throwing away money” all the time.
Before the housing crisis, the average time that someone kept their home before selling and making a move was 6 years. In 2023, it is up to 10 years according to the National Association of Realtors. Lenders know this and want to make sure that they get paid. In the initial years of the mortgage, most of your payments go toward interest directly to the bank. In a 30-year fixed mortgage with a hypothetical 5% interest rate, you don’t reach a tipping point where most of your money is going toward building equity in your home until 16 years and 3 months into the mortgage. It’s even later with higher interest rates. So instead of paying a landlord, many are switching to paying a bank instead.
So, to the question of throwing away money, I like to ask what you consider throwing away money to be? Is it paying money and not getting any equity in return?
Of course, it’s important to run the numbers to see the costs and benefits of buying versus renting a home because every area has different factors impacting it. I’ll give Chicago as an example. According to RentCafe, average rent in Chicago is $2,309 for a 750 square foot home. RedfinRDFN estimates that the median home price in Chicago is $340,000. If you put 0% down, and got, say, a 7% interest mortgage, your monthly payments would be about $3,275 per month including property taxes and insurance.* But that isn’t the only expense. As a homeowner, you would then have to pay for maintenance, repairs, and potentially HOA dues on top of that. What would you get for this $1,000+ monthly difference? A chance to participate in price appreciation or depreciation of your home. If you outlast everyone and stay in your home 20+ years and housing appreciation does better than the long-term averages, then you are certainly no longer throwing away money.
Conclusion
This was part one of an analysis of why it could be okay to rent forever. This article aimed to address some of the common arguments for home ownership and leave those on the fence with some things to consider. The next part in this series will go into benefits of renting and how investors who rent can achieve their financial goals.
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* This entirely hypothetical example for purposes of this discussion is based on an assumed mortgage rate and assumed property tax rates and homeowners insurance premiums. Situations and outcomes will be vary based on these and other variables. You should consult with qualified real estate and mortgage professionals with regard to your needs and circumstances.
This informational and educational article does not offer or constitute, and should not be relied upon, as real estate, mortgage, or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own qualified professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide real estate or mortgage tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve, or make any representations as to the accuracy, completeness, or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #:0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-5957923.1(09/23)(exp.09/25)
So many things are working against would-be home buyers this summer. The housing market remains stuck, with sales pushed lower by a lack of both affordability and inventory, recent credit tightening, higher interest rates and home prices firming up across the country after a brief correction last fall.For Nick Gaylord, the struggle to buy a home in Minneapolis has gone on so much longer than he expected. He has been looking at homes off and on for a year and a half and has lost out on bids he made on four homes.”I’ve been checking listings multiple times a day for months,” Gaylord told CNN. “If something comes up you have only a day or two before it’s gone. I’m showing up the day it goes on the market, making fully underwritten offers, sometimes 20% over , and not getting the house.”Video above: Here are the purchases many Americans are postponingGaylord, who works remotely for a tech company in the health care field, said he earns enough that he has advantages that some other buyers don’t, including a strong down payment and location flexibility. But he is looking in a lower priced and more competitive price bracket, under the median price for the area, because he does not want to over-extend himself, especially as a remote worker in an industry that has been experiencing layoffs.”I’m trying to be responsible and prudent,” said Gaylord. “I could buy a bigger home and get approved, but that isn’t what I want.”He recognizes his privileges coming to the table, and said it is tough to accomplish the commonly held life goal of buying a home, even having those advantages. “If anything that is an indication of how exceedingly difficult it is for people who don’t have a leg up,” he said. Using a metaphor from video games, he said, “I’m playing on ‘easy’ and it is still hard.”Why it’s so hard to buy a home nowThere are many factors contributing to the frustrating housing market this summer. The stubbornly low inventory of homes available to buy is keeping prices up and pushing sales down during this typically busy season. Many current homeowners who bought or refinanced into a 2%, 3% or 4% mortgage rate during the pandemic are reluctant to sell and become buyers with a mortgage at 6% or higher.More than 60% of existing mortgage holders — the potential sellers who could bring inventory to market — are sitting on mortgages with rates below 4%, according to Black Knight, a mortgage data company. Even if they are likely to get a good price selling, they do not have an incentive to list in this environment.Video below: Many Americans think they need to win the lottery to afford a home todayIn recent weeks, as mortgage rates closed in on 7%, affordability has worsened.The monthly principal and interest payment needed to buy the median-priced home rose to $2,258 in June, marking the highest payment on record, according to Black Knight.Nationally, it takes about 36% of the median household income to make the average mortgage payment — more than the recommended 30% allowance for housing. It’s only because of income growth since the fall of 2022 that May was not the most unaffordable month for housing in the past 37 years, Black Knight found.Adding to all of that is a tightening of credit, with credit availability remaining close to the lowest levels since early 2013, as the industry continues to operate at reduced capacity, according to a report from the Mortgage Bankers Association that analyzes data from ICE Mortgage Technology.”Lenders are streamlining their operations by offering fewer loan programs, with some exiting certain channels,” Joel Kan, MBA’s vice president and deputy chief economist. The Mortgage Credit Availability Index fell by 3.1% to 96.5 in May, the lowest level since January 2013, and was essentially unchanged in June. The conventional loan index dropped 2.3% in May, while the government-backed loan index — looking at loans backed by the Federal Housing Administration, the U.S. Department of Agriculture or the Department of Veterans Affairs — decreased by 3.8% in May, and both also remained unchanged in June.Video below: Rossen Reports: Do you qualify for new 40-year mortgage?The tightening credit for government-backed loans makes it even harder for lower-income and first-time home buyers, who are also facing the most severe shortage of inventory.The MBA index that tracks jumbo loans — loans that are larger than conforming loan limits — saw its second monthly contraction, as some financial institutions reduce their appetite for larger loans that aren’t backed by the government.Small bright spots aheadFor people trying to buy a home, the situation can feel overwhelming and prospects may seem dim. Here are some bright spots.Rents are ticking down slightly nationally, even if rents are still out of whack with incomes. Between early 2020 and mid-2022, rents went up about 25%, nationally, according to Realtor.com. But in May monthly rents dipped 0.5% year over year, to a median rent of $1,739 in the 50 largest metropolitan areas. Mortgage rates are expected to drop the second half of this year as inflation continues to cool, with economists and housing analysts forecasting rates to end the year around 6%.Although it may not feel like it, home prices are trending lower nationally. The median home price has been dropping on a monthly year-over-year basis since March, according to the National Association of Realtors. Lastly, during this typically busy time of year there are few buyers, which means less competition, creating an opening for buyers with more limited funds, such as first-time buyers.
So many things are working against would-be home buyers this summer.
The housing market remains stuck, with sales pushed lower by a lack of both affordability and inventory, recent credit tightening, higher interest rates and home prices firming up across the country after a brief correction last fall.
For Nick Gaylord, the struggle to buy a home in Minneapolis has gone on so much longer than he expected. He has been looking at homes off and on for a year and a half and has lost out on bids he made on four homes.
“I’ve been checking listings multiple times a day for months,” Gaylord told CNN. “If something comes up you have only a day or two before it’s gone. I’m showing up the day it goes on the market, making fully underwritten offers, sometimes 20% over [the asking price], and not getting the house.”
Video above: Here are the purchases many Americans are postponing
Gaylord, who works remotely for a tech company in the health care field, said he earns enough that he has advantages that some other buyers don’t, including a strong down payment and location flexibility. But he is looking in a lower priced and more competitive price bracket, under the median price for the area, because he does not want to over-extend himself, especially as a remote worker in an industry that has been experiencing layoffs.
“I’m trying to be responsible and prudent,” said Gaylord. “I could buy a bigger home and get approved, but that isn’t what I want.”
He recognizes his privileges coming to the table, and said it is tough to accomplish the commonly held life goal of buying a home, even having those advantages.
“If anything that is an indication of how exceedingly difficult it is for people who don’t have a leg up,” he said. Using a metaphor from video games, he said, “I’m playing on ‘easy’ and it is still hard.”
Why it’s so hard to buy a home now
There are many factors contributing to the frustrating housing market this summer.
The stubbornly low inventory of homes available to buy is keeping prices up and pushing sales down during this typically busy season. Many current homeowners who bought or refinanced into a 2%, 3% or 4% mortgage rate during the pandemic are reluctant to sell and become buyers with a mortgage at 6% or higher.
More than 60% of existing mortgage holders — the potential sellers who could bring inventory to market — are sitting on mortgages with rates below 4%, according to Black Knight, a mortgage data company. Even if they are likely to get a good price selling, they do not have an incentive to list in this environment.
Video below: Many Americans think they need to win the lottery to afford a home today
In recent weeks, as mortgage rates closed in on 7%, affordability has worsened.
The monthly principal and interest payment needed to buy the median-priced home rose to $2,258 in June, marking the highest payment on record, according to Black Knight.
Nationally, it takes about 36% of the median household income to make the average mortgage payment — more than the recommended 30% allowance for housing. It’s only because of income growth since the fall of 2022 that May was not the most unaffordable month for housing in the past 37 years, Black Knight found.
Adding to all of that is a tightening of credit, with credit availability remaining close to the lowest levels since early 2013, as the industry continues to operate at reduced capacity, according to a report from the Mortgage Bankers Association that analyzes data from ICE Mortgage Technology.
“Lenders are streamlining their operations by offering fewer loan programs, with some exiting certain channels,” Joel Kan, MBA’s vice president and deputy chief economist.
The Mortgage Credit Availability Index fell by 3.1% to 96.5 in May, the lowest level since January 2013, and was essentially unchanged in June. The conventional loan index dropped 2.3% in May, while the government-backed loan index — looking at loans backed by the Federal Housing Administration, the U.S. Department of Agriculture or the Department of Veterans Affairs — decreased by 3.8% in May, and both also remained unchanged in June.
Video below: Rossen Reports: Do you qualify for new 40-year mortgage?
The tightening credit for government-backed loans makes it even harder for lower-income and first-time home buyers, who are also facing the most severe shortage of inventory.
The MBA index that tracks jumbo loans — loans that are larger than conforming loan limits — saw its second monthly contraction, as some financial institutions reduce their appetite for larger loans that aren’t backed by the government.
Small bright spots ahead
For people trying to buy a home, the situation can feel overwhelming and prospects may seem dim. Here are some bright spots.
Rents are ticking down slightly nationally, even if rents are still out of whack with incomes. Between early 2020 and mid-2022, rents went up about 25%, nationally, according to Realtor.com. But in May monthly rents dipped 0.5% year over year, to a median rent of $1,739 in the 50 largest metropolitan areas.
Mortgage rates are expected to drop the second half of this year as inflation continues to cool, with economists and housing analysts forecasting rates to end the year around 6%.
Although it may not feel like it, home prices are trending lower nationally. The median home price has been dropping on a monthly year-over-year basis since March, according to the National Association of Realtors.
Lastly, during this typically busy time of year there are few buyers, which means less competition, creating an opening for buyers with more limited funds, such as first-time buyers.
Sold Price: $800,000
Neighbourhood: Mount Dennis
X-factor: Warm-toned hardwood floors, recent upgrades and modern finishes adorn this two-bedroom-plus-den house in the northwestern part of Toronto.
The detached bungalow at 6 Nickle St. has two bathrooms, including one in the basement. The structure could prove to be an asset if the new owner is looking to rent out part of the home, realtor Othneil Litchmore told the Star.
“The good thing is that it has a separate entrance, so it’s possible that you could put in a separate unit in a basement,” he said.
The previous owners of the home bought it in April 2022 for $900,000. They sold it, only a year later, at a $100,000 loss. Litchmore weighed in on the factors that may have played a role in that outcome.
Why it was priced this way
According to Litchmore, the $800,000 selling price “is about right for similar-sized homes in the area.”
“We were still close to the height of the market,” when the bungalow was sold in April of last year for $900,000, Litchmore said, referring to the sky-high home prices seen in February 2022. “It was still an inflated price,” he pointed out.
The listing agent for the home did not respond to a request for comment in time for publication.
What else we know about the home
According to the listing, the home covers between 700 and 1,100 square feet — a small size for a freehold detached home, Litchmore said, although he added it would be large for a condo.
It has a one-car, detached garage, a trait Litchmore said isn’t great, but is “pretty standard in this neighbourhood.”
The house looks mostly unchanged compared to the listing that was used when it was bought in 2022, leading Litchmore to believe the owners weren’t trying to flip it for a profit.
What we know about the price and list history
The last owners bought the house in April 2022 for $900,000, according to the listing history.
Five months later, they re-listed it for slightly less than the original price at $888,000. By this point, “interest rates were on the rise,” Litchmore said. After two weeks, the home didn’t sell, and the listing was terminated.
They then re-listed the house at different prices several times between October 2022 and May 2023, but each time, the listings — priced between $900,00 and $988,000 — were either terminated or eventually expired.
Finally, the home was listed for $800,000 on May 30, the lowest asking price posted since it was last bought. It sold just days later.
According to a recent report from land and commercial registry company Teranet, there was a “notable” rise in homeowners selling their property within one year of buying since interest rate hikes began last year.
The report, which examined the impact of eight successive interest rate hikes that began in March 2022, said the finding “may suggest home ownership stress for those who purchased at the peak of the housing market.”
Previously, the home had sold for about $510,000 in 2017, the listing history shows.
Tips for people looking at properties like this
For any number of reasons, the previous owners likely “had a change of heart” about wanting the home, Litchmore said.
In today’s market, people should take their time to reach a decision, Litchmore said. With climbing interest rates and high carrying costs, there’s less competition and more time to think, he explained.
“Buy when you’re ready and really don’t rush your decision,” he advised. “Don’t feel pressure to buy right here, right now.”
The home should be one that a buyer can see themselves living in for at least five to seven years, he said.
Additionally, Litchmore said buyers should be strict about staying within their budget.
“If you have to go over budget, make sure it’s something you absolutely love,” he advised. “That will motivate you to hang on even when times get tough.”
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Mortgage rates may finally settle down after more than a year of steady increases, but experts don’t expect much relief for homebuyers.
Nationwide home prices rose for the first time in eight months in February as an increase in demand — spurred by slowing interest rates — ran into persistently low housing inventory.
The sudden jump was all the more notable given price hikes in most of the nation’s largest markets.
Economists expect affordability issues to continue in the coming months even as mortgage rates settle.
Prices suddenly rise after slowing for months
Home prices have cooled significantly for months as the Federal Reserve’s fight with growing inflation has pushed up mortgage rates and, consequently, many prospective buyers out of the market.
Nationwide price gains slowed again in January and were up year over year by 3.8 percent, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. This is down from a 5.6 percent annual gain in December.
But in February, monthly prices climbed nationally for the first time since last spring, and they rose in 39 out of the nation’s 50 largest markets.
Seasonally adjusted prices increased by 0.16 percent last month as 30-year mortgage rates saw declines and inventory challenges continued, data from Black Knight, Inc. shows.
This marks the strongest single-month gain since last May.
“Home sales activity in February was driven by a dip in interest rates combined with persistent low inventory. This has propped up prices in the East in what is typically the beginning of the most active buying season,” Gunnar Blix, director of housing market research at Black Knight told The Hill.
“If low rates and tight inventory persist, that strength may continue to drive price increases. On the other hand, if sales continue to be strong, this may spur further rate increases which could dampen demand,” he added.
Although home prices shot up in most major markets, they fell in several cities that experienced pandemic era booms, including Austin, Texas; Las Vegas, San Francisco and Seattle.
How mortgage rates could affect price growth
Economists suggest the modest, months long price slowdown could taper off further as mortgage rates moderate.
“The NAHB economic forecast indicates that we will see moderate price weakness in the months ahead, despite meager inventory levels, due to elevated interest rates and challenging housing affordability conditions,” National Association of Homebuilders chief economist Robert Dietz told The Hill.
“The general trend of lower home prices will end as the mortgage interest rates settle in around or just below 6%,” he added.
Average mortgage rates dipped for the third consecutive week as of March 30 to 6.32 percent, data from Freddie Mac shows. At the same time last year, the benchmark mortgage rate sat at 4.67 percent.
“Tightening credit conditions, alongside higher mortgage rates and low housing stock, could also negatively impact buyers, especially those looking to purchase their first home,” Yelena Maleyev, an economist at KPMG Economics, told The Hill.
“Tighter conditions, higher than 6% mortgage rates and still-high prices in many parts of the country are continuing to create a difficult environment for buyers, especially first-time buyers. Inventory in the under-$300,000 range remains tight and that is an area where we have seen a continuation of bidding wars,” Maleyev said.
“Homeowners who are looking to move-up in the market are also having a difficult time finding the right home, and some have even resorted to building a new home in the lot of their existing home instead,” she added.
Low inventory will be a long-term challenge for the industry and buyers
Black Knight data revealed that housing inventory fell for the fifth-consecutive month, reaching its lowest point since May 2022. And 90 percent of markets experienced deteriorating inventory levels last month.
“New listings — already trending well below pre-pandemic levels for months — ran 27% below those levels in February as potential home sellers continued to shy away from the market,” Black Knight Vice President of Enterprise Research Andy Walden said in a statement.
Persistently low inventory fueled partly by a dearth of new listings is one of the primary challenges the market faces in the future. Estimates suggest the U.S. housing stock is short by at least one million homes.
“The long-run challenge remains inventory,” NAHB’s Dietz said.
“And given the lack of building over the last decade, leading to a housing deficit measured in the millions, and a growing number of homeowners who are not putting their homes onto the market due to mortgage rate lock-in effects — why sell when you can rent — the resale market will not gain much relief,” Dietz said.
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A new real estate financing company called Ourboro has an offer to help first-time home buyers enter the market, but it comes with a big catch: it will help finance your down payment — in exchange for a sizable chunk of your home’s appreciation in value.
The offer helps to bring home ownership within reach for those struggling to get into Toronto’s unaffordable market, where the average home price is now $1.09 million, requiring a 20 per cent down payment of $218,000.
Rather than paying back the down payment loan over time at a given interest rate, Toronto-based Ourboro is repaid by home buyers when the owner eventually sells — and when that happens, it can take up to a 75 per cent stake in the home’s appreciation.
It is an innovative co-ownership program, but there are also some big trade-offs, say experts.
The percentage of net home value appreciation Ourboro gets when you sell is dictated by the percentage of the down payment Ourboro contributes up front — with a minimum of 25 per cent and maximum of 75 per cent. In effect, the company becomes more of a co-owner rather than a lender like a bank.
Take, for example, a purchase price of $1 million, with a $200,000 down payment split 60/40 between Ourboro ($120,000) and the owner ($80,000). If the home later sells for $1.5 million, the company gets 60 per cent of the net appreciation — the amount left after the mortgage is paid off and whatever amount the homeowner paid in mortgage principle is returned to them (let’s say $100,000). That leaves $700,000, out of which Ourboro would get $420,000.
Ourboro doesn’t make any contributions to the mortgage payments and any principal is given back to the co-owner.
Since the company launched it has received more than 1,000 applications and has contributed $5 million in capital to households across the GTA, said Alex Kjorven, Ourboro’s chief product officer.
In February 2023 the company expanded, launching in Hamilton, London, Kitchener-Waterloo and Guelph. The latest funding round reached $50 million to “keep pace with our pipeline of interested buyers as we expand to new regions outside of the GTA,” she said.
The demand is no doubt fuelled by the high cost of housing in Toronto combined with elevated interest rates that make home ownership feel further out of reach.
So, is it worth looking into Ourboro to break into the housing market?
The risks of co-ownership
The point of home ownership is building equity, but the home isn’t fully yours — the majority of the home’s equity could be Ourboro’s, said Mary Sialtsis, a mortgage broker.
Plus, if you make any upgrades and repairs that add to the home appreciation, the company benefits.
Kjorven noted Ourboro has a renovation policy which allows homeowners to qualify for “renovation credits” that are paid out when the property is sold, giving homeowners a larger share of the sale proceeds.
“The amount of credits homeowners may qualify to receive is a function of the actual cost of the renovation itself versus the impact the renovation had on property appreciation,” she said.
But renovations can significantly add to a home’s value and should be fully awarded to the homeowner, experts say.
Another area of concern is if you decide to buy out Ourboro.
The home can be co-owned for up to 30 years with the first-time homebuyer able to sell the home, or make an offer to buy the company’s share at any time. But this could prove difficult said Sialtsis.
“If you want to buy them out after 10 years, do you have that kind of money? You might need to refinance, and then do you qualify for that new mortgage? There’s a lot you need to think about here,” she added.
The company says the co-ownership model is ideal for those looking to sell within the first 10 years, to not share “decades worth” of appreciation.
Ourboro mandates that prior to closing on the property, the homeowner receive independent legal advice, Kjorven said.
“Ourboro makes it sound like they’re doing this for your benefit, to ensure you don’t give too much of your home appreciation away,” said John Zinati, a Toronto-based real estate lawyer. “But they probably have an interest in getting their money and reprocessing it through another purchase.”
One final factor to consider is the lender. Ourboro has partnered with Equitable Bank, a private lender, which requires less paperwork from the buyers but has additional fees and higher interest rates than a typical bank.
Any of the Big Six banks won’t agree to finance these kinds of mortgages, said Sialtsis.
“Getting private lenders should be a loan of last resort,” she said. “Always try financing a home on your own first.”
The benefits of co-ownership
The program allows homeowners to get into the market using an innovative strategy, some experts say.
Tim Hudak, CEO of the Ontario Real Estate Association, wouldn’t comment on Ourboro’s business model specifically but said co-ownership makes housing more affordable and gives people more choice.
Because many Canadians highly value home ownership, making the process accessible is a benefit, said Karen Yolevski, chief operating officer at Royal LePage.
“We know that the down payment is a challenging aspect of the home buying process and options are good with the ability to help with your down payment,” she said.
Ourboro could also be helpful if someone wants a slight top up to reach a 20 per cent down payment.
Sialtsis said if a buyer has 15 per cent of the down payment, then getting five per cent from the company isn’t a bad idea — if a down payment is less than 20 per cent the homebuyer is restricted to a 25-year amortization and mortgage insurance. Therefore, putting at least 20 per cent can stretch your dollar, she said. But the buyer should save as quickly as possible to buy out the company which will have a 25 per cent share (the minimum under the terms of the agreement) in the home equity.
The Government of Canada already offers a co-ownership program with the First-Time Home Buyer Incentive that was introduced in 2019. The government offers five or 10 per cent of the purchase on a newly constructed home and five per cent for a resale, or existing home. However, in Toronto, that assistance doesn’t go far, said Sialtsis.
The government could do more to help homeowners, especially in the country’s most expensive markets, she added. Rent-to-own homes are also an option that Sialtsis would explore with her clients before choosing Ourboro.
Co-ownership with a company is different than co-owning with a family member, Zinati said. “Remember, they are in it to make money.”
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In the thick of the pandemic, and three years after they immigrated from India, Mifrah Abid and her family were asked to vacate their townhouse in Milton so their landlord could sell it.
The order left them scrambling. Abid’s children were 10 and six, two of her family members were immunocompromised and prices had just started inching toward a pandemic rush. It became clear Abid’s family would have to leave behind the only connections they had as new immigrants. Even renting a single bedroom condo in Milton would cost $2,100 — far more than what they were paying for the three bedroom townhouse.
Rental prices in other cities weren’t particularly promising either. “It just didn’t make sense … we couldn’t go back to renting,” said Abid, an anti-racism advocate.
So they set out to buy a home wherever they could outside the unaffordable GTA. Abid and her husband, who is a web developer, ended up buying a townhome in Kitchener. “We didn’t have the great Canadian dream of owning a suburban house, it wasn’t something we envisioned for ourselves for at least the next 10 years,” Abid said, noting they had to borrow money from family. “It’s a privilege not everyone can afford.”
Even with high mortgage rates, she suspects her family would be paying a comparable price in the rental market, just without the security of ownership. “Homeowners are able to amass a down payment … that’s the only thing differentiating a homeowner from a renter these days.”
Despite facing a more expensive market, historic interest rate hikes and soaring inflation, many young families and millennials — a generation thought to have written off the postwar dream of a house and the picket fence — are entering the housing market to escape the insecurity and cost of renting. While they remain apprehensive about taking the plunge into ownership, some see it as the lesser of two evils.
In fact, it’s more dire to be a renter than a homeowner in Toronto for those born between 1981 and 1996, according to 2021 census data provided to the Star. Thirty-one per cent of millennial renters pay unaffordable shelter costs — shelling out 30 per cent or more of their income for housing — versus 24 per cent of millennial homeowners.
While home prices in the GTA have plunged relative to the market peak in early 2022, Toronto renters aren’t expected to receive similar relief. Instead, rental costs across southern Ontario have gone up by double-digit percentages in the last year, a trend experts don’t expect to change anytime soon. The Toronto region has 125,000 rental units scheduled for construction in the next 10 years — about 175,000 short of the projected demand.
For those lucky enough to challenge generational stereotypes about housing, escaping the precarity of the rental market is top priority, but it also comes with huge financial risks.
Kyle Todd, 35, and his partner had conversations all the time about how home ownership felt unattainable due to the never-ending price increases. He works in sales while she works for the Toronto Public Library. “We didn’t think it was going to be possible, we didn’t have a lot of savings,” Todd said.
But the couple hadn’t had the best experiences with landlords in the city, and felt like there was a lack of security with renting. At the end of 2020, when interest rates were historically low, Todd and his partner were able to cobble together a down payment using the RRSP he’d been building and other savings. Even then, their down payment wasn’t 20 per cent, and the couple knew they’d have to pay a lot in mortgage insurance.
“Anything we could get into is what we were going to do,” Todd said. “It sounds crazy, but that was the kind of desperation.” The couple locked into a fixed mortgage, and bought an older townhome in Mississauga by January 2021. “I have a lot of nervous energy about three years from now when we have to renew our mortgage,” he said.
“We know there’s some risk we might have to sell … and we might not make a ton of money if we have to.”
“Younger Canadians and newcomers of any age are demanded by this housing system to take on so much more economic risk with these massive mortgage debts,” said Paul Kershaw, a professor at the University of British Columbia’s School of Population and Public Health. He’s also the founder of Generation Squeeze, a think tank focused on addressing generational inequality.
According to Kershaw, in the mid-1970s, one would spend around $250,000 in today’s currency on a home in Toronto, with a salary of around $55,000. “The average price of a house was about four and a half times larger than the typical earnings of a young person.” Today, the average home in Toronto costs just over $1 million, and people are making slightly less, $54,000. “Now, the ratio is more like 20 to one.”
This increased burden of debt can be too much to bear, according to a recent study by an Ontario insolvency firm that found about half of all 2022 insolvencies were filed by millennials.
Despite the uncertainty about the affordability of his mortgage, Todd feels “incredibly fortunate” to own. He also feels guilty when he thinks of his friends who might not ever afford a home. “I feel like it’s just a broken system.”
Tim Capes, a 40-year-old principal engineer in the technology sector, intends to help his son Ben avoid the housing dilemma altogether. Capes bought his house in August 2021, a month before his son was born. “It seemed like the thing to do in face of endlessly rising rents in the city,” he said.
Capes said he isn’t centring his eventual retirement plan on the sale of his house. He plans to gift it to his son. “I want him to be able to do what he loves rather than picking a career solely for financial reasons.”
Buying a house ended up being a troublesome decision for his single-income family, considering Capes lost his primary job soon after the purchase, but not one he regrets. He also doesn’t feel invested in home prices rising to increase the value of his own house — being able to keep it is Capes’ main priority.
“What’s much more important is that home ownership becomes more affordable and accessible to people,” Capes said.
William Strange, an economic analyst and policy professor at the University of Toronto’s Rotman School of Management, said most economists would like to see more Torontonians with that perspective. “Buying a house because you expect it to appreciate in value is precisely what led the world to bubbles in the past,” he said. “And bubbles, when they burst, are incredibly disruptive to households and to the whole financial system.”
Amanda Ieraci, 28, had few expectations when she bought a one-bedroom condo in Fort York recently. “Trying to rent can get very crazy, very quick,” the marketing associate said, referring to her stint as a single renter. “I didn’t want a lot of my salary going to rent without the ability to budget for anything else in my life.”
After many nights spent with mortgage calculators, Ieraci determined she could purchase a condo, but would only qualify if her parents co-signed, due to the stress test. She’s glad she locked in when she did, because both current interest rates and rent prices would be near impossible to manage on her single income.
Declining house prices don’t really concern Ieraci, since she was able to stick to her budget with a small place. “I try to keep it modest,” she said about her 460 square-foot condo that overlooks a parking garage. “If I could get a window in my bedroom, that was success to me.”
Ieraci doesn’t view her home as an investment. “It’s more than that,” she said. “For young people, it’s such an achievement.”
“I just hope it gets easier.”
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Affordable housing advocates and homebuilders are pushing President Biden to take another crack at expanding affordable housing despite partisan divides in Congress.
During Biden’s Tuesday night State of the Union address, the president announced a plan to end homelessness for veterans and issued a general call to “get more families access to affordable, quality housing.”
But in a speech largely focused on lowering costs for families, the president spent little time on an increasing and debilitating expense for millions of Americans.
Biden had attempted to secure more than $150 billion for expanding affordable housing in the previous Congress but was unable to secure enough support from moderate Democratic senators.
While Biden faces an even tougher road in a GOP-controlled House, advocates say it’s no reason to give up amid the rising costs families face for both leases and home loans.
Alicia Huey, president of the National Association of Home Builders (NAHB), said Biden “missed a golden opportunity … by failing to lay out his vision to combat the nation’s housing affordability crisis” in a statement, though she praised the president for referencing the “critical issue.
“Easing the affordability crisis should be a top priority for the White House and Congress,” Huey said.
Is American real estate completely unaffordable?
The pandemic and policy response accelerated trends that had long kept housing unaffordable for many Americans, even those with steady jobs and sturdy savings.
Latisha Clingerman, a special inspector for state government in Kansas, said she struggled for years to afford a home until she was able to purchase one in Wichita through the help of Habitat for Humanity.
She said despite paying her rent on time each month, she was unable to be approved for a traditional mortgage and felt increasing pressure as rents spiraled higher each month.
“With the cost of rent going up, of course, everything else goes up. So I was not able to really put money aside because I had four kids to take care of,” Clingerman said in an interview with The Hill.
“It was a constant ‘taking from here to pay this’ and never really being able to get a savings going,” she said.
And other homeowners, some of whom capitalized on historically low mortgage rates early in the pandemic buying boom, have been negatively affected by the chaotic market.
Homeowners from May to September 2022 collectively lost $1.5 trillion in equity.
Clingerman, now a homeowner for 11 years, has been able to avoid the strain of higher interest rates thanks to Habitat for Humanity’s low caps on mortgage costs.
But she said two of her sons are currently struggling to find an affordable apartment to rent in Wichita, where rents rose 1.8 percent last month alone, according to Apartment List.
“It would be nice to see if [lawmakers and the president] could figure out a way to cap these interest rates, because that’s what really gets people,” Clingerman said, and “find a way to make it” easier for would-be buyers to be approved for mortgages “if people are paying rent for years on time.”
The gap between Black and white homeowners is the same as it was in 1968
Even so, advocates are urging lawmakers to act on systemic issues impacting access to not only affordable but also fair housing.
“It’s important to note, rather, that affordable housing on its own does not equate to fair housing without effective enforcement of our nation’s robust fair housing and lending infrastructure,” Nikitra Bailey, executive vice president at the National Fair Housing Alliance, an organization dedicated to ending housing discrimination, told The Hill.
“Fair access to housing free of discrimination is essential to create equitable opportunity,” Bailey said.
Bailey added that equitable housing practices are vital to closing the racial wealth gap in the U.S. She noted that there is a persistent 30 percent difference in homeownership rates between Black and white Americans.
That is the same disparity that existed when the Fair Housing Act was passed in 1968.
To shore up the gap, NFHA is calling for a slew of fair housing initiatives, including $250 million in funding for Fair Housing Assistance programs to ensure enforcement at the state and local levels.
NFHA is also pushing for a down payment assistance (DPA) program targeting first-generation homebuyers.
“And this is very critical, because what it what it takes into consideration is that prior generations were excluded from homeownership opportunity, and if we fully invest in a robust first generation DPA program — we’ve called for $100 billion — we could grow homeownership by 5.2 million new homebuyers,” Bailey said.
Has the housing market already crashed?
The U.S. is short at least 1 million homes amid one of the most volatile housing markets in more than a decade. And since the beginning of the pandemic, both rents and home purchase prices have soared.
These factors combined with high mortgage rates have pushed prospective homebuyers to the sidelines and back into the rental market. Many of those affected are either first-time or first-generation homebuyers.
And while home prices began falling slightly under the weight of higher mortgage costs, the combination of slightly lower sale prices with much higher interest rates has left some homeowners unable to upgrade or downsize as needed.
“Rising mortgage rates caused many households to be priced out from home buying and would-be buyers to remain renters,” wrote Moody’s analysts Lu Chen and Mary Le in a research note.
“Apartment demand surged as a result and drove rates sky high. As the disparity between rent growth and income growth widens, American’s wallets feel financial distress as wage growth trails rent growth,” they wrote.
What makes a house ‘unaffordable’?
A home is typically considered unaffordable if a family must spend more than 30 percent of its income on it.
Depending on a variety of factors, including average household income and various local market forces, what the actual income number looks like across the country can vary widely.
Recent data shows a decline in housing affordability over the last few years by both the standard definition and by a measurement of the number of homes affordable to a family earning the nation’s median income.
The NAHB-Wells Fargo Housing Opportunity Index released last week found that housing affordability is at an all-time low.
According to the index, just over 38 percent of new and existing homes sold between October and the end of December were affordable for families earning $90,000 annually.
Rent and housing prices have risen to new highs
Home prices had risen steadily for more than a decade before the pandemic struck and accelerated rapidly when a combination of trillions of dollars in federal stimulus and ultra-low Fed interest rates fueled a surge in demand for housing.
The steep increase in home prices also put pressure on rents, which skyrocketed amid the boom in housing demand and a long-term lack of construction.
Americans are now spending an average of 30 percent of their income on rent, according to Moody’s Analytics. Last year marked the first time the U.S. was rent-burdened nationwide since Moody’s began tracking rent-to-income ratios more than 20 years ago.
“The last few years have definitely shined a spotlight on the affordability crisis in a way that didn’t happen before the pandemic,” said Rob Warnock, analyst at Apartment List, in an interview with The Hill.
While rents also began to decline toward the end of last year, “relative to where we were before the pandemic, markets are still really expensive,” Warnock said.
Some housing relief may be on the horizon
Relief, however, could be on the way for some parts of the country soon.
Housing affordability is already making strides on the rental side of the market, with prices rising at their slowest rate in 20 months. A new report from real estate brokerage Redfin shows nationwide median asking rents rose by 2.4 percent to $1,942 in January. This is the smallest increase since May 2021.
“We’re watching closely to see whether rents start falling year over year. That would be a welcome relief for renters because it hasn’t happened since the onset of the pandemic,” Redfin chief economist Daryl Fairweather said in a press statement.
“If rents do start falling on a year-over-year basis, it will mean that renters have more room to negotiate,” Fairweather added.