TorontoRealtyBlog

I’ve been hearing about “the market crash” since before I even started to sell real estate back in 2004, but if there’s been one consistent theme throughout my two decades in the industry, it’s that people have a fixation with  this idea of a major collapse.

We’ve heard the term “bubble” almost as often as “crash” or “collapse,” and that too has been a constant in the market.

After a few years in the market, watching what was going on, and experiencing the market dynamics, I began to think that Toronto was different.

While I risked taking the same tone as the gambler who says “The Harlem Globetrotters never lose,” or the banker who says, “Lehman Brothers is an American institution and it could never fail,” I really did begin to think that this “correction” in the Toronto real estate market was never coming.

We saw the market retract in 2008, 2017, and 2022.

But relative to prices before those retractions, we could hardly call this a “collapse.”

The average home price in Toronto was $315,000 when I started in 2004.  It was almost $1,200,000 last year.

While we have seen 4-6 month periods of cool markets, and periods of hyper-appreciation followed by periods of decline, I think it’s fair to say that those calling for the “crash” back in 2004, or 2007, or 2011, or 2016, were proven exceptionally incorrect.

When I had been in the market for five or six years, I started to theorize just why the Toronto market was different.

It began with this age-old metric: debt-to-income ratio.

Common sense said that if this ratio was constantly increasing, then it spelled bad news for the real estate market.

But my theory held that since most low-income earners don’t own their homes, or shouldn’t expect to (that seems to have changed with the uptick in socialism, but I digress…), then the amount of consumer debt that low-income earners carried on their credit cards really wouldn’t affect the real estate market for midtown Toronto houses.

The second age-old metric that spelled doom for the real estate market was the ratio of income-to-house-prices.

If incomes aren’t rising in line with home prices, then eventually, those “runaway” home prices would have to come down.

But my theory held that two factors rendered this metric obsolete.

The first was rampant immigration, which saw people coming to the country with down payments originating outside the country, in different currencies, and in different labour markets, not to mention with entirely different earning potential.

The second was that the greatest redistribution of wealth in the history of mankind was about to take place: Baby-boomers giving their children money.

If home prices were increasing by 6% per year, but wages were only increasing by 3% per year, this didn’t matter, so long as parents were giving their children hundreds of thousands of dollars for down payments, or acting as a guarantor on a Mortgage, or simply making the mortgage payments!

And having watched so many of my clients receive financial assistance from their parents over the years, I think my theory held true.

Perhaps this isn’t why we’ve seen the average Toronto home price almost quadruple in two decades, but it’s certainly a factor.

Over the years, we’ve seen a segment of society realize this, but also cry out against it.

Who could forget the classic marketing campaign in 2021:

Can’t Afford A Home? Have You Tried Finding Richer Parents?

A yes, the classic “shame game,” in this case to make people of means feel awful, regardless of whether they were born into means or created it for themselves.

If you’re not familiar with the story, here’s a Toronto Star article that seemed to enjoy it:

“‘Have You Tried Finding Richer Parents?’ Sarcastic Billboard About Housing Crisis Goes Up In Toronto”
Toronto Star
May 21st, 2021

And here’s the billboard in question:

We’ve seen the “blame” for housing prices land upon many targets over the years.

Foreign buyers, Realtors, investors, flippers, AirBnB hosts, and of course parents of buyers.

But even in 2023, this is still a topic, and I’m surprised.

Then again, we used to think of the “help from parents” as a cash gift for a down payment.  Billy and Susy can’t afford that $1,200,000 starter home on their own, so each of their parents gifts them $150,000 and, voila!  A down payment and money for land transfer tax.

But somewhere along the way, we started to see this “help” come in other forms.

How about mom or dad acting as a guarantor on a mortgage?  Or what about Mom and Dad actually going on title to the mortgage?

Or what about Mom or Dad making the mortgage payments?

I’ve seen a rash of similarly-themed articles in the media of late so I thought this was worth exploring today.

This appeared last month:

“The Bank Of Mom & Dad Is No Longer Just For Down Payments”
The Globe & Mail
October 30th, 2023

From the article:

Parents have moved beyond helping their children with a down payment, with high home prices and interest rates forcing them to co-sign on mortgages themselves.

For first-time homebuyers, adding their parents’ income on a mortgage application can make the difference between being able to purchase a home or not. But mom and dad should keep in mind the potentially complicated tax and financial considerations related to putting their names on the title, experts say.

High property values and borrowing costs have translated into outsized mortgage payments for prospective buyers. Many young homebuyers are finding their income isn’t high enough to qualify for a loan.

Because of federal regulations, most buyers must show they’d be able to afford mortgage payments based on a qualifying interest rate that is two percentage points higher than the contract rate offered by their bank. Currently, that stress test rate is around 8 per cent.

That’s where parents are now stepping in, said David Larock, a broker with TMG The Mortgage Group. Parents are increasingly co-signing just to help kids pass the mortgage stress test and qualify for a mortgage that they’re capable of paying for on their own at the bank’s contract rate.

Another possibility is becoming a loan guarantor, who is liable for mortgage payments but isn’t listed on title. But it’s more complicated to hold a guarantor with no ownership accountable if the borrower defaults, so lenders generally prefer that parents be on title, he added.

Mom and dad are also more frequently paying part of the mortgage instalments too, said Jason Anbara, an Ottawa-based mortgage agent. In the past, Mr. Anbara said he would often have to suggest to clients that they find a co-signer. Now, many come to him with family agreements already in place.

I almost want to “LOL” but I can’t, since people my age aren’t legally allowed to use these acronyms.

But this article, in no short order, addressed all three of the methods of “help” that I mentioned above, which is why I flagged it for discussion.

Earlier this spring, I was representing a single woman in the purchase of her Toronto home after a divorce.  She was a loan income earner and her ex-husband’s salary was substantially higher than hers.  She came out of the marriage with a significant cash settlement, but that would only help her with the down payment on the house.  Based on her income, she couldn’t qualify for a mortgage on what she wanted.

Here’s where we get into the “wants versus needs,” but while I tried to explain that, with her significant down payment, she could afford a beautiful home, she wasn’t willing to settle.

So who came to the rescue?

Mom and Dad.

Except they didn’t give her more money for the down payment, but rather they agreed to put their names on the title to the property so their daughter could afford the home.

I’m pretty sure she can afford the monthly payments on her own, but the banks have raised interest rates and tightened lending criteria to the point where this particular buyer wasn’t getting approved.

There are likely other examples of my buyer clients purchasing houses or condos with their parents on title, but I’m not always privy to the financing.  This situation just happened to be one where I knew the back story.

Likewise, I did have one buyer client tell me in the summer that his dad would be helping him with the monthly payments.

He’s an early 20’s banker, relocating from the United States, who was just starting his first job.  Based on the strength of the American dollar, he elected to buy rather than rent, even though he has never lived in Toronto before.

He purchased a condo that’s right in the heart of the Financial District which would essentially act as his bed, and nothing more.  He plans to work 100 hours per week for the first two years.

But he’s likely going to see a majority of his compensation come in the form of a bonus, and while his salary is more than decent, he couldn’t handle the monthly mortgage payments plus the extremely high monthly maintenance fees that you find in a luxury, white-glove building.

So who came to the rescue?

Mom and Dad.

In this case, I suppose dad, since his father was the one who pushed him to buy this condo in the first place rather than rent, and as a result, his Dad will be subsidizing his first two years with a monthly allowance.

I know what many of you are thinking:

Must be nice to have parents who fork over dough like that!

My first allowance was fifty-cents per week back in 1986.

Now, kids are getting $2,000 per month from their parents to pay for their mortgage and maintenance.

Times have changed!

But this has been happening for as long as I’ve been in the business.  It just wasn’t written about quite as much.

Earlier this month, personal finance columnist, Rob Carrick sought to survey parents who had provided their children with financial assistance in the housing market.

Check this out:

“Parents Helping Their Adult Kids With Housing Costs, Round Two”
The Globe & Mail
November 7th, 2023

I have yet to see the results of the survey, but perhaps that’s coming in another article.

One of the topics raised in this survey, and in the subsequent comments that followed, was the idea that some parents are taking equity out of their homes to help their children enter the housing market.

Think about that for a moment.

It’s one thing to provide your children with cash that’s sitting in your investment account so they use the money as a down payment.

But for those who don’t have any cash, can you imagine selling off a chunk of your home via a reverse mortgage or HELOC so you can hand the money over to your children?

One reader commented:

I find it concerning how many people are borrowing against their homes so that their children can get into the market, especially as we head into one of the most uncertain global economic conditions we’ve seen in living memory.

So what do you call a 78-year-old who takes equity out of his or her home to provide to the two children so the children can buy houses themselves?

a) The sweetest most caring parent there ever was.
b) An enabler and a sucker.

I think the vote will be split 50/50 here.

But I had one such experience that gave me sleepless nights and might do so all over again if I spend the next ten minutes typing it out for you.

Here we go…

A client of mine is in her late-70’s and has two daughters; one in her early-40’s and another in her late-30’s.

Both daughters want to live in Toronto.

Neither can afford to do so.

Not only that, both daughters were renting, and both had serious issues with safety.

I won’t get into the details here, but both daughters tried to find a suitable rental in a “nice” area but neither could afford to do so.

My client came to me one day and essentially said, “I want to empty my bank account and take care of my girls.”

She explained that she didn’t actually have any money in the bank, but rather she saw her 2-bed, 3-bath condo as a safety deposit box for her equity.

“You know those commercials you see on late-night TV that talk about taking money out of your home?” she asked me.

I cringed.

I know the ads.

You all know the ads.

“Please tell me you didn’t call one of those numbers, did you?”

She laughed and said, “No, dummy. I called you!”

She then proceeded to tell me that she wanted to take out as much money from her condo as she could and give it to her two daughters so they could buy houses, and not just so they could buy but rather so they could make large enough down payments that they would never have to worry about the monthly payments, even if interest rates skyrocketed.

Before I could really start in with my opinion, she said, “I know this isn’t a sound financial decision, but I don’t care.  I could be dead in ten years.  I could be dead next year,” she said.  “I want to help my girls today, and I want my grandson to grow up in a safe area with a good school.”

We were having coffee but I honestly thought she was drunk when she said, “I want to drain my whole condo.  Just keep draining till there’s nothing left, and I’ll leave the keys on the counter, and walk away!”

I was stunned, but she brought the story full circle and said, “I guess I’d just move in with one of the girls….if they’d have me!”

I really, really didn’t like the idea, but she was set on it.  I couldn’t talk her out of it, but it also wasn’t my place to do so.

I wasn’t privy to the financial arrangements that she made, but I believe it was some combination of a lump sum followed by a monthly draw.  This would help her daughters with their down payments as well as their monthly payments.

Right or wrong, she had no issues with what she did, and still brags about it to this day.  She has told me on multiple occasions, “Best thing I ever did for the girls.”

Perhaps that’s why we see articles like this floating around too:

“Children Of Homeowners Twice As Likely To Own Homes Themselves, Says StatsCan”
CBC News
November 20th, 2023

From the article:

Whether or not your parents own a home makes you twice as likely to own one yourself, according to a new data analysis by Statistics Canada.

In a report published Monday, the data agency crunched the numbers on home ownership rates across income levels, provinces and age brackets and found that one of the best determinants of whether or not a young adult owned a home in 2021 was whether or not their parents did.

Specifically, the report looked at people born in the 1990s, which means it’s examining an age cohort between the age of 23 and 33 years old.

Among everyone born that decade, the home ownership rate was 15.1 per cent, but older members of the cohort were more likely to own than younger ones.

The home ownership rate for people born in 1990 was 33 per cent. For those born in 1999, the ownership rate is just 2.1 per cent.

Almost one out of every six Canadians born in the 1990s owned a home in 2021, but among those whose parents didn’t own a home, the ownership percentage was 8.1 per cent — about one out of every 11.

If the young adult’s parents own a home, however, the ownership ratio jumps to 17.4 per cent. That makes them more than twice as likely.

And the more homes the parental generation owns, the more likely the children were to own, too.

I think we should be happy that the homeownership rate for people born in 1999 is only 2.1%.

Since when should 23-24 year olds expect to own homes in a world-class city?

In any event, I don’t recall a time when I saw so much attention on the parents of home-owners and home-buyers as I have of late.  Except maybe for the spring of 2021 when that stupid “find richer parents” billboard went up and it was in the news cycle.

How long until the federal government bans parents from helping their kids with down payments, mortgage approvals, or monthly mortgage payments?

KIDDING!

I’m just kidding.

Totally kidding.

Hmm.

Then again…

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