Canadian homebuyers need financial help from their parents
The national real estate market is facing another wave of buying madness following one of the sharpest housing price drops in Canadian history. Now, homes in Toronto are selling the day they enter the market. In Vancouver, lines for open houses are blocks long. Properties are again selling for hundreds of thousands of dollars over asking.
The question is where they get their money from for such purchases.
Although home prices were down by almost 16% during the previous 11 months, according to Oxford Economics, Canada’s real estate is the least affordable in more than 40 years. The reason is that mortgage rates went up much faster than the prices went down. So how are homebuyers coping with that? It looks like they can receive financial help from their parents.
“The bank of mom and dad is an important factor in the majority of transactions,” – Jonathan Cooper, president of Macdonald Real Estate Group, said of the first-time homebuyers in the current market. “We’re in the middle of an unprecedented transfer of assets.”
About two-thirds of Canadians have their own homes, and after a 553% hike in housing prices during the previous 25 years, many have built up significant equity. In addition to it, people accumulated extra savings during the pandemic, so it all created a large pool of capital waiting to be transferred to the next generation.
While there is no current data on the level of financial help homebuyers are getting, CIBC research in late 2021 showed that 30% of first-time buyers did receive financial gifts from their parents, and the average gift amount went up to $82,000.
Such gifts are probably playing an even more important role in today’s market in order to help fill the affordability gap caused by higher interest rates, says Benjamin Tal.
“I’d be surprised if we’re not seeing a large amount of gifting,” – he noted, adding that about $300 billion in extra savings Canadians accumulated over the pandemic are most likely increasing the size and dominance of gifted down payments.