What is the Property Ladder?
The Property Ladder is a term that has been imported from the United Kingdom, where the scramble for affordable housing in London is even more competitive than in Canada’s largest cities; and it helps to explain how the average investor, by putting money down on real estate, can hope to ascend, rung by rung, from rental apartment, to starter home, to family-sized home, and perhaps whatever else lies beyond. The concept is so well-known because it is an accessible idea with plenty of anecdotal and numerical data to support it.
According to its proponents, young investors seeking to grow their personal net worth and improve their standard of living ought to enter the housing or condominium market as soon as possible. This drive takes them to the first rung on the property ladder — the starter home, typically a one-bedroom condominium unit in an urban area. It is suitable for one or two people, maybe even a newborn child, but is insufficient for the growing demands of family life. People in this situation find themselves ‘under-housed.’ The size of their living space, after a while, does not meet the requirements of their lifestyle.
In comes the second rung. As young investors pay down their mortgage, the equity in their first property increases. They can begin using their disposable income and the money they have earned and saved, in conjunction with the estimated resale value of their current home, to supply the downpayment on a future mortgage for a larger, more valuable property that can accommodate increasing standards of living.
In Canada, where cottaging is a popular summer pastime, investors can diversify their real estate portfolio with a vacation home. This is the third rung, and it is usually reached after investors have built up enough equity in their family-sized home, that they can take on properties that do not serve as their primary residence. Whether for lack of funds or lack of interest, not all homeowners get to this point; but a great many do, and their numbers help to illustrate how the Property Ladder can help investors think more broadly about the ways properties can support their lifestyles.
The fourth rung is a more recent addition, and its inclusion has as much to say about the status of homeownership amongst younger generations as it does the ways older generations can yet again diversify their property holdings. Call this the Legacy Rung. As homeowners age, their children will move out of the house, whether for college, a career, or both; and, when this happens, parents have increasingly sought to carry their financial legacy forward by using the equity in their own home to finance the downpayment on their children’s mortgage.
Whether or not they have provided that support, aging homeowners will nonetheless find that the property they purchased to house a family with children now holds just two people. These homeowners are ‘over-housed.’ They either do not need a property that size, or can no longer stomach the commitment that comes with it. Many will choose to hold onto these properties as grandchildren are born and grow up; but others, approaching retirement and seeking to make the most of their golden years, will sell their home, move into something smaller, and use the excess funds to finance their desired lifestyle.
It is better to think of the property ladder as a life-cycle that maps your relationship with property from young investor to retiree. The progress it outlines helps those aspiring to homeownership set their priorities and gives them a sense of direction. However, it is a guide, and nothing more. It should not be seen as a concrete plan. Not everyone pursues a vacation home; nor will they use their home equity to finance a mortgage on behalf of other family members.
If you are looking for a better analogy, think instead of a property tree. At some point, you will be climbing up its trunk; but, as the branches spread out in disparate directions, so, too, do your possible futures. Which branches you choose to climb is your decision. Each comes with its advantages and disadvantages, and no two paths are exactly the same.
When you sit down to write your Homestory, think of how owning a home at any stage will affect your life. Make that your first rung, and see where it takes you.
