FX168 Financial News (North America) News Canada's wealthy parents and grandparents are becoming obscure supporters in the real estate market. They are increasingly shouldering financial burdens to help their children buy homes.
As housing affordability continues to decline, young homebuyers who lack down payments and income are relying on family support to turn their home buying dreams into reality.
Unfortunately, while family financial support is beneficial to some, it also exacerbates the problem for others, as those receiving parental assistance are able to buy larger, more expensive homes. As a result, housing prices have risen, making it more difficult for buyers without family support to afford real estate in an already tight market.
In a recent paper published by the Bank of Canada, Jason Allen and his co-authors explore the subtle impact of household financial support on housing affordability. They found that while these cash transfers and loan guarantees are beneficial to recipients, they further worsen the affordability of housing for others.
Over the years, Canadian regulators have introduced various measures to restrain lenders and borrowers. These measures include limiting loan-to-income ratios and loan-to-property value ratios, and implementing stress tests. Beginning in 2016, insured mortgage borrowers are required to review their eligibility at an interest rate level that increases interest rates by 2 percentage points. In 2018, this requirement was extended to uninsured mortgages.
These measures have created new affordability barriers for all, but first-time homebuyers (FTHBs) have been hit the hardest. Unlike repeat buyers, first-time buyers usually don't have net worth from previous property sales to help buy a new home. To this end, the federal government has launched initiatives aimed at helping first-time homebuyers. However, the rapid rise in housing prices and slow growth in real wages for young workers quickly eroded this group's ability to buy homes. This is where parents and grandparents began to help.
The Bank of Canada's documents used mortgage contract data from the Financial Institutions Supervisory Authority and credit reports from the TransUnion Credit Bureau, and compared first-time homebuyers with older co-signers with mortgages without co-signers. Their data shows that the share of first-time homebuyers with mortgages co-signed by parents rose from 4% in 2004 to 13% in 2022.
Nearly 11% of first-time homebuyers' mortgages are co-signed by parents or seniors. Three-quarters of adult children with co-signers won't be able to get a mortgage without parental support and income guarantees, indicating that family support is critical for lower eligible borrowers.
Parental assistance enabled first-time buyers to buy more expensive homes and enter the market earlier than their peers. The price of a property purchased with family support is 7% higher than a property without such assistance. The average age of beneficiaries is nearly five years younger than those without support, and they can get a mortgage even with a low credit score.
The impact of household support on affordability becomes apparent when examining beneficiaries' home purchase prices. Bank of Canada's analysis shows that without a parent's signature, the average adult child needs to buy a 37% lower house to get a mortgage. Alternatively, they would need an additional down payment of around $203,430 to afford the same house they bought with the support of their parents.
Financial support from family members is adding to Canada's growing burden of household debt. Canada's mortgage debt soared from 500 billion Canadian dollars in 2000 to more than 2 trillion Canadian dollars in 2023. Additionally, one-third of parent co-signers reported that they have a home equity credit line.
The Bank of Canada's analysis revealed that after the mortgage was issued, borrowers receiving parental assistance had higher mortgage and non-mortgage delinquency rates.
Support from the federal government and parents is compounding Canada's growing debt burden. Among the G7 countries, Canada has the highest household debt-to-income ratio of over 180%, while the US and Germany each have 100% ratios.
A more prudent way to improve housing affordability is to regulate rising housing prices by building enough new homes to address Canada's long-standing housing deficit. At the same time, governments and businesses must work to increase weak productivity, which is partly due to slow growth in real wages.