Almost one in five first-time home buyers is getting financial help from parents, and the average amount of that help is $150,000.
If you’re wondering how first-time buyers can afford the down payments required to get into the housing market today, these numbers, drawn from the Canadian Imperial Bank of Commerce client database, offer some insight. Increasingly, housing is a well-off family’s game.
The average resale home price in Canada in August was $663,503, which means a 10-per-cent down payment would amount to just over $66,000. That’s high, but nothing compared to Toronto and Vancouver. Average prices above $1-million in these cities mean a minimum 20-per-cent down payment, or $200,000 at least.
Low interest rates have kept mortgage payments manageable for first-time buyers, even as housing prices have soared. For many buyers, the bigger obstacle is the down payment.
CIBC numbers indicate that 19 per cent of first-time buyers are getting parental help, up from 15.5 per cent in 2015. There’s nothing remotely new in parents helping adult children buy houses – many boomers and Gen Xers had this support. But the dollar amount of help has more than doubled from the 2015 level of $71,000.
Almost 6 per cent of non-first-time buyers got parental help, down a bit from 7.2 per cent in 2015. But the average amount of money given to these move-up buyers by their parents jumped to $198,000 from $83,000 in 2015.
Benjamin Tal, deputy chief economist at CIBC World Markets, said these are preliminary numbers he will explore in an upcoming report. For now, he surmises the money is coming from a mix of debt and savings.
“We know that a huge number of parents have been benefiting from this [pandemic] crisis financially, and I suggest that some of this accumulation of cash is going towards down payments as a gift,” Mr. Tal said.
The growth in down-payment gift amounts is much more than inflation at work. The average parental down-payment gift of $71,000 in 2015 would be just $79,533 today if adjusted for consumer price index inflation.
Mr. Tal said there’s a sense of urgency among parents with adult kids who don’t have houses. “Parents are encouraging kids to get into the market to take advantage of extremely low interest rates and they’re saying, you know what, we’ll help.”
The federal Liberals promised some down-payment help for first-time buyers in the party’s election platform. The maximum mortgage eligible for default insurance, and thus down payments of less than 20 per cent, would rise to $1.25-million from $1-million and be indexed to inflation.
But a crack has opened in the foundation of housing affordability, and it widens every time house prices rise. On one side are young adults with parents who are willing and able to contribute down-payment money. On the other are prospective buyers who must go it alone in an economy in which house prices are just one aspect of an inflationary surge that is running well ahead of wage gains.
Mr. Tal believes parental gifts are part of the reason why house prices have risen so sharply. “Clearly, this is significant,” he said. “It makes the difference between getting into the market and not getting into the market.”
It’s hard to know what to say to the young adults with no help from BOMAD – the Bank of Mom and Dad. Save harder? You’re lucky to get 1.25 per cent in a savings account today. Try stocks to grow your down payment? The market has surged to a point where downside risk outweighs upside potential for new money. Crypto? Sure, and risk the decapitation of your down payment in one bad day.
We are left with solutions for aspiring homeowners that have limited applicability, such as buying in a small town or sharing a home with retired parents or even friends. Or you can wait until rising incomes and falling or stagnant house prices converge in a way that makes down payments more affordable.
While waiting, you can watch your friends Poppy and Brad scoop up that average $150,000 parental down-payment gift and jump into the market. High down-payment gifts actually perpetuate unfairness – those who get them have smaller mortgages and thus can save more and spend more.
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