Bosley Realestate

How The Bank Of Mom And Dad Is Stabilizing Canadian Real Estate Prices

July 21st, 2018 | Real Estate

Welcome to my blog on Housing, Culture, and Design in Toronto! This is where I share my insights and experiences on most every aspect of the Toronto Real Estate Market - and life here in Hogtown!

It was about five years ago when I began documenting the rise of the Bank Of Mom & Dad as an influencer of Toronto real estate prices, and have tracked it's effect on the market trends ever since. Here's an excerpt from my most recent Urbaneer Toronto real estate forecast which shares some new insights on the significant influence of familial financial support on our current housing climate:

 


 

Toronto housing prices are stabilizing! It's preferrable to the meteoric rise we've experienced over the past 3 years, but unfortunately the cost of owning a home won't be decreasing any time soon either.

Despite the Provincial Government's efforts to cool our scorching hot market - by introducing the Ontario Fair Housing Plan in April 2017 andthe Federal Government's introduction of a Mortgage Stress Test for buyers putting down more than 20% at the beginning of this year (the Mortgage Stress Test was already in place for high-ratio financing buyers) - the attempt to stop run-away prices only occurred temporarily in the higher priced freehold market; it also unexpectedly compressed the pool of active buyers into the more affordable condominium market where prices have since ramped up a further 20 per cent.

While the measures did introduce relief in some segments of the market, affordability continues to be a pressing issue as average prices for the most part are still very high and difficult for many first timers homebuyers to afford. It’s a bit of a perfect storm for unaffordability. We have the combination of  high housing prices, government interventions and climbing mortgage rates simultaneously taking a big bite out of first timer's purchasing power. Click here to read “Hike To Mortgage Qualifying Rate Fresh Blow To Home Hunters’ Buying Power” and “Canada’s Mortgage Test Just Got Tougher”. While first timers may view their lower debt threshold as a barrier to purchase, limiting the ability for homebuyers to take on more mortgage is positive, because this strategy helps to reduce the overall household debt load, which is astronomically high. Debt accumulation in Toronto vastly outpaces income growth, which creates a financial house of cards.

As the entry point on the property ladder for first-timer Buyers becomes even more restricted, is homeownership still a viable dream in a market like Toronto? Although we are seeing a marked shift in Toronto towards the rental landscape as affordability consistently erodes and purpose-built housing development increases, the dream of home ownership continues to burn brightly - but not without a view through the lens of reality check. Millennials are having to reshape the idea of home ownership, in the current marketplace.

This story “From Broom Closet To Detached Home: What Millennials Can Afford Across Canada” examines exactly how much Millennials’ purchasing power has shrunk in the last year, relative to the market that they hope to buy in. In a city like Toronto, that pullback in purchasing power has caused Millennials to rethink buying strategies, which has had an interesting result, according to this study from Royal Lepage referred to in the story. While their dollars technically get them “less house” as home prices continue to far outpace incomes, the average square footage that millennial Toronto homebuyers get with their purchase has actually gone up.

Enter the Bank of Mom and Dad

One of the critical factors I'm seeing in the market today - as it pertains to first and second time Buyers - is the ongoing influence of parental finances in real estate purchases. Affordability has become a relative term in Toronto;  “affording” a home has become equated with maxing out your mortgage just to get into the market, not using the typical measures of household debt. And yet Millennials keep on buying!

How are they doing this? Yes, some are compromising on housing type or location, but more often than not, theyre capitalizing on support from the Bank Of Mom And Dad!

 

 

One thing that Millennials are doing enmasse to facilitate the purchase of a home is turning to their parents. Where with a gift of a down payment or by co-signing a loan, purchasing property has become a family affair. I've been witness to the Bank of Mom and Dad since 2013 when it started becoming more common for parents or grandparents to help their off spring. It makes sense as a pre-inheritance, and it's one of the reasons why the Toronto real estate market has remained so strong. Here's one of my posts on the subject called Relying On The Bank Of Mom And Dad - as well as Are Strings Attached When Parents Help You Buy?. I’ve consistently served this group of Buyers, with some financial assistance from the Bank of Mom and Dad, willing to spend upwards of $1.4mil.

Not only does this financial assistance let this young cohort become homeowners; it ends up having an impact of the market, supply and escalating prices. While the Government has tried to curb demand by limiting borrowing power and by raising taxes and fees to deter speculation and foreign investment, they may have underestimated the steady flow of capital into the market via the Bank of Mom and Dad and the pressure on prices.

 

 

 

Market Strength in Numbers

According to Sotheby’s International Realty Canada’s Generational Trends Report, Baby Boomers comprise about a third of the real estate market. They are major influencers on the market. The report finds that most Urban Boomers have amassed wealth through real estate over the years and that their real estate investments have outperformed their financial investments. No doubt a reflection of their own experience, the majority feel that purchasing real estate is still a wise investment, despite high prices.  Thirty-five per cent of respondents from Toronto intend to give their children a living inheritance,  of which the median amount is $25,000 to $49,999.

It is important to note that, while Boomers frame their own real estate investments based on their own experience in the market, the same experience of enormous real estate gains won’t be the experience for the Millennials. It’s all about timing and about income inequality. The Boomers purchased at not only lower prices, but at much lower debt levels, meaning that values could grow and debt could reduce in tandem to create that wealth. Millennials will be purchasing at a time when the debt-to-income ratio is substantially higher, already cutting into their gains. As of the writing of this piece, Stats Can puts the current debt ratio in Canada (household debt as a proportion of household disposable income) at 168 per cent. We owe 68 cents for every dollar that we make.

Interest rates are an important component of this as well. Even though interest rates were substantial in the years when the Boomers were buying their homes (click here to read "Dear Urbaneer: Interest Rates In The 1980s And Now") their overall debt was much lower in relation to their incomes. Even though interest rates have climbed recently, limiting the borrowing power of Buyers, given the current economic climate, rate hikes might take a breather in the months to come. If we do engage in a trade war with the U.S.A., as appears to be looming, the economy will face some new challenges. When the economy is facing challenges, interest rates hold steady, or in some cases even go down. When rates are low, debt tends to go up; when rates are high, debt levels are low. And as I mentioned, when you begin your journey to build your net worth heavily laden with debt, the return on investment will be less.

It is a good idea for adult children and Baby Boomers alike to reframe their expectations around home ownership which is touched on in this article “Millennial Housing Crisis? Turns Out, It’s Real And Worse Than You Thought.” This article serves as a sobering reminder for parents to consider ‘paying any price’ to help their kids buy a home. The cost of home ownership extends far beyond the purchase, and can the kids manage in the long term if they can’t afford it on their own today?  Read Parents Can Financially Suffocate Their Kids By Helping Them Buy houses”.

We encourage you to read “Is The Bank Of Mom And Dad Driving Up Demand And Prices In Canada’s Housing Market?” and “One-Third Of Baby-Boomers Helping Millennials Buy Real Estate”. Great insight here!

 

 

 

The Growth of Multi-Generational Housing

Similarly, Mom and Dad are active participants in another housing phenomenon, borne in part by high housing prices and by the high cost of childcare in Toronto, there is a growing trend for homes that are able to house multiple generations, assisting adult children with their childcare and also setting up a supportive path for parents to age longer in place with the nearby support of their adult children. This isn't a new phenomenon, but it is experiencing a resurgence. In 1940, pre-WWII, about one-quarter of the population lived with three or more generations in one home, a trend which began to decline in the 60's and 70's, reaching an all-time low in 1980. Now it's on the rise again in Canada, in part due to our ageing baby boomer population and our sky-rocketing house prices. Did you know that, "between 2001 and 2016, multi-generational households were the fastest-growing household type in Canada, increasing by 38% to reach nearly 404,000 homes?" ( - 2016 Canadian Census.)  For more insights on how this is playing out in Toronto, read my blog How Demographics Affect Toronto Real Estate. This impacts the market as well because it directs demand, putting additional pressure on supply. Click here to read “Immigration, Aging, Housing Costs Fuel Rise In Multigenerational Households” and “Why More Canadians Are Embracing Multigenerational Households”.

Want to see an example? In our November 2017 - Home Of The Month - Scarborough, we share the journey of a Zoomer couple who, after some reflection and collective counsel, began to consider how their future might look in their elder years. As we each navigate how we might age-in-place it's critical to assess our strategy to live in our own home and community safely, independently, and comfortably, regardless of age, income, or ability level. This includes reconciling potential issues of mobility, as well as ease of access to family, services and amenities. Which is how our Buyers recognized there might be merit in merging their Toronto residence with their son, daughter-in-law and granddaughter, who owned their own house downtown. By selling two properties to acquire a larger property that offered a space plan well-suited to multi-generations, they've been able to integrate collective support, nurture familial bonds, while retaining some independence. How amazing is that?

 


 

Want to learn more about what's happening right now with Toronto real estate? Here's the links to Part One and Part Two of Urbaneer’s Spring/Summer 2018 Toronto Real Estate Forecast!

At Urbaneer, we support you through the purchase and sale, but we also support you as a homeowner, making your new house into your “home”. Please know my team and I are here to help, without pressure or hassle!

Thanks for reading!

 

Sincerely, 

~ Steve & The Urbaneer Team

Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000

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