Economist Benjamin Tal is forecasting a strong spring market in Canadian real estate and, with it, an even larger presence for the “bank of mom and dad”.
“You basically see people trying to get into the market before it’s too late,” Mr. Tal says.
Parents have become increasingly generous in recent months as they pull out the stops so their adult children can buy a first home or move up to a better one. FOMO – fear of missing out – has infused the market with interest rate hikes on the horizon.
Mr. Tal, deputy chief economist at CIBC World Markets, says the share of first-time buyers receiving help from parents has been climbing steadily to about 30 per cent at the end of the third quarter last year from about 19 per cent in 2015.
His most recent data show the share of young buyers receiving gifts had edged up an additional one per cent by the end of 2021.
The share of move-up buyers receiving gifts from parents stands at about nine per cent, but that trend has been declining since 2018.
For both groups, the gifts have been getting larger as the average price has soared. Mr. Tal says the parents injecting cash have not been motivated by the pandemic as much as the trajectory of prices.
“It is highly correlated with house prices.”
The size of the average gift had jumped another $10,000 by December from the $82,000 earlier in the fall.
In a market as richly-priced as Toronto, that gift was more likely to be in the $130,000 range last year.
Andre Kutyan, broker at Harvey Kalles Real Estate Ltd. in Toronto, sees first-hand how well-established parents are influencing the market – from the first-time condo buyer up to the $10-million luxury home buyer.
“I think the bank of mom and dad is definitely amplifying things,” he says of the upward pressure on Toronto real estate. “The rapid price appreciation is scaring a lot of parents. They’re afraid that their children are not going to be able to afford anything.”
Mr. Kutyan recently helped a young couple purchase a three-bedroom detached house in the Seaton Village area, near Christie and Dupont streets in Toronto. The parents provided the firepower to beat competing bids.
The house was listed with an asking price of $1.479-million and Mr. Kutyan’s research showed that comparable houses had recently changed hands for between $1.65-million and $1.7-million.
But with listings so scarce in January and many buyers feeling anxious, Mr. Kutyan figured the property would likely set a new milestone.
He also knew the baby boomer parents had deep pockets so when the bidding went to a second round, he suggested they raise their offer to $1.801-million.
“I don’t know the other people we are up against,” he advised, explaining other bidders could also have family backing. “If you don’t buy this one, the next one is going to cost more.”
The parents listened and secured the deal. In many cases, the parents decide on the house and the kids go along with their choice, he adds.
The practice contributes to wealth inequality, he adds, because clearly not all buyers have that cushion.
Mr. Kutyan worked with another young couple who were moving up from a one-bedroom condo unit where they worked at opposite ends of the dining table next to their exercise machine.
They didn’t have the benefit of family largesse so they looked in the relatively affordable Wallace-Emerson neighbourhood near Dufferin and Dupont streets, where they found a house with an asking price of $1,099,900.
“Make sure you blow out the competition in the first round,” was Mr. Kutyan’s recommendation.
Their bid of $1,501,800 got them the house.
The second couple ended up paying about 20-per-cent less and opting for a less central neighbourhood in order to get their foot in the door, he points out.
One pair of Generation X homeowners approached Mr. Kutyan recently to sell their large house near Bayview Avenue and York Mills Road. Their goal is to downsize and free up about $1-million in the trade.
The parents plan to give $500,000 to each of their two twenty-something children so that they can buy a first property.
Parents are also sharing their abundance with adult children who simply want to improve their living circumstances now.
Mr. Kutyan received a call from one agent asking him if he has any listings coming up in the $10-million to $12-million range. The elder generation wants to help fund a move up from a house around the $3.5-million mark.
The buyers are aiming for a specific area so that the grandchildren can attend their preferred private school. The house should have five bedrooms and a pool, they specified.
The challenge, Mr. Kutyan says, is that houses in that neighbourhood typically change hands for $8-million or $9-million. The adult children receiving the money are willing to pay more than market value in order to be in the neighbourhood.
“It’s family money that’s being passed down to them. It’s hard to compete with people like this,” he says. “They’re willing to pay a premium because they’ve got the family backing.”
Mr. Kutyan called three of his clients who purchased houses in the area in the past few years on the off-chance they might be tempted.
“Perhaps if there’s an opportunity with a silly price,” a homeowner who hadn’t planned to sell might reconsider. Of the three, he says, two rebuffed the idea and one is lukewarm.
Mr. Tal at CIBC warns that older generations should be cautious about being too generous with their gifts – whether they are handing over cash, signing on as a guarantor on a mortgage, or buying an investment condo for a young child’s future.
He believes the current burst of activity in the housing market is partly a result of demand being pulled forward.
“We are borrowing activity from the future – and the future will arrive.”
Mr. Tal at CIBC is forecasting that the Bank of Canada will begin to raise interest rates in March.
The economist expects the growth in real estate prices to slow in the second half of 2022 as rates rise. A gradual increase in rates would moderate demand and prove healthy for the market, in his opinion.
Mr. Tal believes population growth and limited supply will cushion real estate prices from a correction. But he cannot rule out a pullback after the unharnessed run in prices, he adds.
“When prices go up by 20 or 25 per cent during the course of breakfast, there’s always a risk.”
One possible trigger would be a faster pace of rate hikes than Bay Street is expecting.
Currently, the narrative shared many economists is that supply chain issues will clear up and inflation will subside. But there is also the chance that narrative won’t play out as predicted, he cautions.
Mr. Tal notes that economic downturns in 1990 and 2008 were triggered by central bankers raising rates too quickly.
“That can shock the system.”
He cautions that parents who want to help their children should not do so by jeopardizing their own finances.
“I definitely suggest that they should not take on a lot of debt,” he says. “If you get yourself into a situation where you are risking your retirement, think twice.”
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