Mortgage financing from the Bank of Mom and Dad – good for the kids, bad for the market?
WATCH: New numbers reveal nearly half of first-time home buyers, and those looking to upsize, need financial help from their family. But, it’s a vicious cycle that’s driving up home prices. Reid Fiest explains.
Laura Parsons helped her kids buy their first homes. And she was happy to do it.
“They were both renting terrible places and vacancy’s low in most cities and the rents are huge,” said the Bank of Montreal spokesperson.
“I’ve seen the difference it’s made in their life. And now I’m a grandmother over the last month two times and now I know that my grandchildren have a great place to live. And it’s not a dirty place and it’s a nice neighbourhood.”
According to Parsons’ bank, plenty of other parents are making the same calculations: According to a BMO survey, 42 per cent of first-time home buyers are looking for financial help from the proverbial “Bank of Mom and Dad.”
“We’ve noticed it quite a lot in the market,” said Parsons said. “It’s becoming more and more popular.”
WATCH: BMO mortgage specialist Laura Parsons discusses the increasing number of young Canadians who are affording homes thanks to Mom and Dad including her own children.
According to the BMO report, because housing prices are being pushed up in many markets, nearly half of the first-time buyers who turned to family members for help wouldn’t have been able to afford a house otherwise.
“Desperation is one way of putting it, I suppose,” said Richard Harris, a professor at McMaster University’s School of Geography.
And it’s great for the individuals who get financial help, he said. Not so great for the economy or housing affordability broadly, however.
“All it does is it helps to inflate values, prices even further. In the long run that’s to no one’s or hardly anyone’s benefit.”
“And in the short run, it hurts those, and there’s many, many, many of them, who don’t have parents who can contribute whatever it might be – a significant chunk towards a down payment.” So homeownership moves further out of reach for anyone who doesn’t come from a wealthy family.
An April 2015 report from mortgage insurer Genworth Canada found that four in 10 first-time home buyers in Vancouver received a loan or gift from a family member to help with their down payment, and 35 per cent in Toronto did. Overall in Canada, 28 per cent received a gift or loan from family for their down payment.
There isn’t much good data on the effect that familial contributions can have on the housing market, said Harris.
“In this present kind of situation, what it’s almost certainly doing is reproducing inequality. Whether it’s increasing that inequality, I don’t know, but it’s certainly a mechanism for reproducing it.”
At the same time, Harris said, the gap between the median incomes of renters and home owners has been growing, making it harder for tenants to become owners.
“It just seems extremely likely that what it translates into intergenerationally is that people whose parents are tenants and never managed to get into home ownership, they aren’t in a position to help their children get into home ownership.”
But Parsons argues people who don’t have parents pitching in can still buy property – they just have to work harder at it, through savings and cutting expenses.
“It’s not a matter of them being marked right out of the market, in my view. It’s them preparing for it.”
A tighter budget may also mean settling for a fixer-upper first home – something Parsons doesn’t think enough new buyers consider.
“Our first home, we fixed up everything. We did all the renos ourselves,” she said.
“I ripped up three layers of tile. I don’t think we’d see first time home buyers or millennials doing that.”
And while Harris knows this parental helping hand can hurt the market, he also knows how it feels to be a dad who just wants his kid to have a nice home.
Last weekend, Harris’s daughter and her husband bought their first house – with help from both sets of parents.
“She’s of an age where she wants to have kids. Their present situation wasn’t going to work for that or certainly didn’t seem to make sense. And we could afford it. That’s of course the other thing,” he said.
“It was a viable thing for us to do and that’s why we offered.”
Edit: An earlier version of this story incorrectly stated that the “median income of renters and homeowners has been growing.” It should have stated that the gap between the median incomes has been growing.