This is the first installment of Priced Out, a three-part series looking at housing affordability challenges facing young people in Canada.
Paddy Treacy calls himself and his fiance “dinks,” short for “dual income, no kids.” At 29, the Toronto-based small-business owner runs a restaurant-servicing company, which, before the COVID-19 pandemic, was the source of half of the couple’s annual income of around $150,000.
But despite having two solid paycheques and few significant financial outlays for years, Treacy and his partner lack what is increasingly a prerequisite for homeownership in Canada: a generous loan or gift from the bank of mom and dad, also known as BOMAD.
Treacy has a friend who recently bought with help from his father. The house was in Dartmouth, N.S., where home prices now average more than $370,000, a nearly 40-per-cent jump since a year ago but still eminently affordable compared to much of southern Ontario.
For his part, Treacy says he and his partner are prepared to live anywhere within a two- to three-hour ride from Toronto. The couple had been eyeing Guelph, Ont., as a possible home base, but real estate prices, which have climbed by more than 30 per cent since the onset of the pandemic, are out of reach now there too.
“Even if we leave the city, there’s nowhere to go,” says Treacy.
A cash injection from parents or grandparents has for years been a necessary oomph for many young homebuyers in Vancouver and Toronto, two of Canada’s priciest real estate markets. But with mind-boggling home-price increases spreading from coast to coast and through suburbs and smaller towns during the pandemic, aspiring homeowners without family financing are running out of options.
Real estate craze and BOMAD worsening inequality
The housing market has contributed to rising economic inequality for years, and the pandemic real estate craze has accelerated that trend, says Ricardo Tranjan, a political economist and senior researcher with the Canadian Centre for Policy Alternatives.
On the one hand, Canadians who’ve been able to keep their jobs and save up during the health emergency are engaging in baffling bidding wars, paying vastly over already sky-high asking prices, Tranjan says. On the other hand, lower-income workers, who have been disproportionately affected by the pandemic-linked economic downturn and are more likely to be renters, are now in some cases facing evictions, he adds.
The mind-bending home price appreciation much of Canada has witnessed over the past several months is also widening the wealth divide between the house-haves and have-nots, Tranjan notes.
“People who get in, managed to buy their home — even if they struggle to to to save that down payment. even if the mortgage itself takes on a large part of a paycheck — over time they are accumulating wealth and really fast-growing wealth,” he says.
Canada’s MLS Home Price Index, which adjusts for distortions in the average home price, has risen 23 per cent between April of 2020 and April of 2021, the biggest year-over-year jump since at least 2005, according to data from the Canadian Real Estate Association (CREA).
And while Canada’s national average home price has long been skewed by high property values in Vancouver and Toronto, the pandemic housing boom has brought double-digit price appreciation to cities and towns across the country.
The largest year-over-year gains have occurred in Ontario, which has seen prices rise by approximately between 20 per cent and as much as 50 per cent, CREA said in its April housing report. British Columbia, Quebec and New Brunswick have posted gains of, roughly, between 10 per cent and 30 per cent.
And more recently, the housing market has been heating up even in the Prairies and Newfoundland and Labrador, with prices increased of between five per cent and 15 per cent.
Further, some of the steepest appreciation has occurred in smaller communities. For example, Ontario’s Lakelands region — which includes the municipality of Muskoka, in the heart of the province’s cottage country — has seen prices rise by just shy of 50 per cent over the course of the past year.
Those gains are boosting the net worth of homeowners while leaving behind many renters who aren’t able to save much, Tranjan says. In March, he published a report showing that of the 3.4 million of renter households who depend on employment or self-employment to pay their landlord, more than 40 per cent have less than one month’s worth of income saved.
The fates of homeowners and renters are going “in very different directions,” Tranjan says.
And increasingly, climbing onto the real estate wealth ladder requires a financial push from family, he adds. While there’s little hard data on exactly what percentage of first-time homebuyers nationwide are receiving help from their family, a 2017 poll by financial products comparison site Ratehub.ca, found that 43 per cent of millennial homebuyers had financial help.
A 2019 study by RBC found that more than 90 per cent of surveyed parents with adult children between the ages of 18 and 35 were providing financial support. And nearly half were still supporting children aged 30 to 35.
And when it comes to purchasing a home, it’s mostly parents and grandparents who have themselves reaped the benefits of homeownership who are in a position to help, Tranjan notes.
He calls this “an intergenerational transfer of wealth” that he says is “corroding” Canada’s middle class.
If your parents are ready to help, sit down and talk it out
Having parents who are ready to co-sign a mortgage or contribute a chunk of the down payment with a loan or gift is a privilege, says Cindy Marques, a certified financial planner and co-CEO of Paper and Coin, which provides financial coaching for millennials and Gen. Z. But family financial help is often shrouded in silence, she adds.
Marques, herself a millennial, says some of her clients feel acutely uncomfortable about needing help for their families, while others are all too ready to accept the financial assistance. Either way, money remains largely a taboo topic for parents and their adult children, she notes.
If you’re first-time homebuyers considering financial aid from BOMAD, the first step is to sit down and have a frank discussion, Marques says.
“It’s important for both parties to come together and be very open, honest and forthcoming because … money can really upset family dynamics,” she notes.
For one, you’ll want to make sure that the help you’re receiving isn’t jeopardizing your parents’ (or grandparents’) long-term financial health, she says. It’s important to understand where the money would come from. For example, if you’re parents are themselves borrowing in order to gift you all or part of your down payment, “it doesn’t make sense to essentially just switch the burden of interest payments on debt to your parents and take that money,” she says.
Beware that if your parents are raiding their Registered Retirement Savings Plans (RRSPs) to help you, those withdrawals are taxable, Marques adds.
“That could very negatively impact their retirement,” she says.
And it doesn’t hurt to inquire about whether your parents or grandparents have planned for possibly needed long-term care in their later stages of retirement, Marques says.
A recent survey from Edward Jones Canada, found that nearly 60 per cent of Canadians aged 55 and older had no savings set aside to meet potential health and long-term care costs. But those outlays can be significant. While costs vary across provinces, the national average fee for a private room in a long-term care home is $33,349 per year in Canada. For in-home care, elderly Canadians are looking at about $30 an hour on average, according to the report.
“Even if your parent feels like (they) have everything (they) need to take care of (their) expenses and get started on (their) retirement, they might not be thinking about the what-ifs,” Marques says.
You could still accept part of your parents’ retirement rainy-day fund if you’re ready to “pitch in heavily” for them later on, when they may be the ones needing help, she adds.
It’s also important to understand whether and what strings might come with BOMAD funds, Marques says. If your parents want the money back eventually or want to charge interest, it may be a good idea to get that in writing, she says.
“Sometimes just having it in writing establishes it as a loan and makes it feel more serious,” she says.
And keep in mind it’s possible for BOMAD to help too much, Marques warns. For examples, having your parents as co-signers on a mortgage may lead you to borrow more than you can comfortably afford on your own.
You may want to stress-test your own finances to ensure you’d be able to keep up with the mortgage payments even if your income were to take a hit, she says.
Meanwhile in Toronto, Paddy Treacy isn’t holding his breath that home prices will drop to a level he and his fiance can afford on their own any time soon.
“It seems unsustainable, and yet that’s what we say every couple of years, like ‘this is a bubble, it’s going to burst’ — and then it somehow doesn’t.”
He would love to remain in Toronto, where is partner’s family lives and where his business employs half a dozen people. But it’s tough to see how he’ll ever become a homeowner there.
“It’s really disheartening to me that it seems the city just doesn’t want me to stay.”