The Canadian housing market’s secret sauce is parents helping first-time buyers with down payments.
According to a report due to be issued Monday by CIBC Economics, parents gave their kids just more than $10-billion in down-payment help over the past year, which was 10 per cent of total down payments over that period. Just less than 30 per cent of first-time buyers got this help, which averaged $82,000.
The CIBC report is one of the first attempts to dig into the impact that parental gifts are having on a housing market where prices have surged higher for more than a decade.
Low interest rates, immigration and a pathological drive to own homes have mostly fuelled the housing market. Parental money is a final ingredient – the secret sauce.
“Given the trend and the size of gifting, it is clear that this phenomenon is becoming an important factor impacting housing demand and therefore home prices in Canada,” Benjamin Tal, deputy chief economist at CIBC World Markets, wrote in the report.
The cost of these gifts is a widening wealth gap between young adults who receive financial help for a down payment and those who don’t. Mr. Tal writes that these gifts can make the difference between owning and not owning a house, and thus being able to participate in future home price gains.
“Furthermore, gifting also works to reduce the size of the mortgage and therefore leads to significant savings on interest payments over time,” he wrote.
Mr. Tal says parental down-payment gifts are not a new phenomenon. Close to 20 per cent of first-time buyers received this help in 2015, when the average amount was just more than $52,000.
But the sense of urgency parents feel about helping their kids buy a house seems to be intensifying. Mr. Tal’s report says the average gift has grown in size by an average annual 9.7 per cent since 2015 – two percentage points faster than the pace of home price growth. The importance of this money is underscored by the fact that it was the primary source of down-payment money for two-thirds of first-time buyers who received a gift.
Parents in the country’s two most expensive housing markets were particularly generous. CIBC numbers show the average gift in Toronto during the first three quarters of 2021 was more than $130,000 for first-time buyers, while move-up buyers received an average of close to $200,000. Vancouver parents who helped their kids buy a first home gave an average $180,000, while move-up buyers got $340,000 on average.
Move-up buyers – those going from a starter home to something larger – get a surprising amount of help from parents. Close to 9 per cent received this assistance in the past year, down a bit from prepandemic days. But the average amount of help jumped to $128,000 as of last month from close to $70,000 in 2015.
Mr. Tal earlier released preliminary numbers on parental down-payment help that showed a somewhat different picture – fewer buyers getting assistance and a higher average gift. These early numbers were based on buyers whose only source of down payment was a parental gift, whereas the new numbers include buyers who combined their own resources with assistance from parents.
A key question raised by the massive flow of money from parents to adult children: Where do these dollars come from? The CIBC report says it’s mostly savings. Using data from the credit monitoring company Equifax, Mr. Tal estimated only 5.5 per cent of parents providing down-payment gifts used debt. All bets were once again off in Toronto and Vancouver, where almost 10 per cent and 14 per cent of parents, respectively, went into debt last year to provide down-payment money.
CIBC found the share of first-time home buyers getting parental help with a down payment didn’t change in the pandemic. However, cash stockpiled by families that maintained their income through the economic lockdowns of the past 18 months has found its way into down-payment gifts. The CIBC report says this may explain the recent increase in the amount of help provided.
The question yet to be answered about down-payment gifts is whether we are at a tipping point for parental obligation. Is helping your adult children get into the housing market on its way to becoming the new normal? Must parents try to save for that, alongside their retirement?
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Rob Carrick