A prominent figure says concern on surging house prices is prompting parents to purchase for their children today
Anyone who’s been following the Canadian housing and mortgage markets in recent times is familiar with the phenomenon of “the Bank of Mom and Dad.”
That trend, which has seen parents and guardians increasingly lending a helping hand to their children to fund their mortgage down payment, is becoming ever more prominent with house prices surging and affordability emerging as a huge issue for new buyers.
A related but perhaps less-reported occurrence is seeing investors who are weighing up a foray into either the stock market or the Toronto housing market opt for the latter – with the fact that their children can live in the purchased property a few years down the line effectively swinging their decision.
Elan Weintraub (pictured top), co-founder and director at Mortgage Outlet, told Canadian Mortgage Professional that those soaring property values had led to concerns among parents that their young children will not be able to afford Toronto real estate in the future, spurring them into making a move now.
“For those who are considering investing in the stock market or real estate, the tiebreaker can often be the possibility that if they buy a place downtown, maybe in the future their kid can live there,” he said. “It’s not the primary driver, but it can be an important part of their decision.”
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The same goes for new builds, with Weintraub noting that some investors are looking ahead to starting construction on newly purchased properties so that they’ll be ready by the time their children hit early adulthood.
“I’m also seeing clients buying properties for new construction because they have a 14- or 15-year-old kid, and those properties will be ready in four or five years so their children can assume ownership at that time,” he said. “It’s definitely something that higher-income, higher-net-worth people are looking at.”
Another trend that’s come to light as a result of the growing unaffordability crisis facing new buyers is parents co-signing with their children – a move that can be helpful for first-time buyers who are able to afford their down payment, but struggle to meet the minimum qualifying requirements under stress test rules.
With changes to that qualifying rate last June by the Office of the Superintendent of Financial Institutions (OSFI), mortgage applicants are now required to qualify at the higher of the contract rate plus 2%, or 5.25% – whichever is higher.
Weintraub gave the example of an accountant or engineer in their mid-20s making around $70,000 annually and living with their parents who might be able to afford their down payment but struggle to meet the qualifying rate.
“The hard part is qualifying for the stress test, that 5.25% level, especially [if] their actual interest rate is much lower,” he said. “The answer is Mom and Dad not gifting a down payment, but rather co-signing, which allows them to fulfil the obligation of the stress test.”
Could OSFI take action to nip that trend in the bud? Not likely. Weintraub pointed out that that the body’s regulations are designed to protect and safeguard the stability of the financial system, rather than help Canadians buy housing or advocate the consumers.
“OSFI doesn’t fundamentally care about consumers – they care about the infrastructure,” he said. “That’s their mandate. From their point of view, when parents co-sign, there’s actually more stability. Mom and Dad are tied in not just emotionally, but legally.”
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With much discussion swirling around the industry about the steps that federal or provincial bodies might make to ease the affordability struggles facing new buyers, Weintraub predicted that the government would make it more difficult for investors to buy property within the next two years.
“Whether that’s through taxation or programs, it will offset to make it easier for homeowners to buy owner-occupied property,” he said. “Maybe [the government] will require investors to have 35% down. Maybe they’ll let first-time buyers amortize their mortgage to 30 years.”
That said, he added that the government couldn’t afford to introduce such measures without tackling the number-one issue facing the housing market at present: its lack of inventory, particularly in the red-hot Toronto market.
Weintraub said that the difficulties facing new entrants to the market were considerable. “The challenge for first-time buyers is that they might be being responsible and saving up $30,000 a year, but the market is going up 10-15% a year,” he emphasized.
“Even though they’re doing everything right, they’re being disciplined and they’re goal-oriented, they’re falling further and further behind.”
