‘Gift letters’ have become a common form of currency as young buyers struggle to save down payments
Toronto mortgage broker Jake Abramowicz sees so many first-time homebuyers armed with major money from Mom and Dad, he actually has a little pep talk for those going it on their own.
“I tell them: You guys are really doing something special. It’s really hard to pay rent in Toronto, pay off student loans and save money for a down payment for a home. You should be very proud of yourself.”
For almost a decade now, Abramowicz has specialized in helping first-time buyers get mortgages. During that time he’s seen house prices soar, lending rules tighten and more buyers — now at least 75 per cent of his younger clients — armed with “gift letters” or tens of thousands of dollars from their baby boomer parents.
“How else do you think someone in their 30s can afford a Leslieville semi?,” asks Abramowicz, 36.
“I see deals where parents are contributing $50,000, $100,000, $400,000. The Mom of one of my best friends sold her farm for $2.5 million and gave him $450,000. He bought a condo in Liberty Village for cash.
“He works very hard and he knows he’s extremely fortunate.”
Helping out the kids is hardly new. Nor are gift letters — the disclosure documents parents sign as part of the mortgage approval process that details their contribution to their kids.
But the amounts being signed over have reached staggering heights in the GTA where skyrocketing house prices have made baby boomers richer than they could have ever imagined, while leaving their kids struggling to get a toehold in a market that continues to climb into the stratosphere.
Abramowicz finds that most parents come to the table later in the game, after they’ve watched their kids struggle to pull together as much as they can on their own. Seldom do the adult children he deals with ask for help, he finds.
Often, parents are keen to contribute enough so their kids can get to 20 per cent of the purchase price and avoid having to get pricey mortgage insurance from the Canadian Mortgage and Housing Corp.
CIBC economist Benjamin Tal believes that backstopping by Mom and Dad, coupled with low interest rates, has kept the first-time buying market far more buoyant than many experts had expected in the wake of the tougher mortgage lending rules imposed by Ottawa over the last four years.
He’s been aiming to study the issue for a year now, but says it’s very hard to determine how much help is being given, and in what form, because there is almost no research on the subject and most young buyers are too proud to talk about it openly.
“The (housing) market would have been much weaker if we didn’t have this phenomenon. There’s no question about that,” says Tal, deputy chief economist of CIBC World Markets.
“I’d say this generation is getting more help than any other generation did, but I’d say they need this help more than any generation, too.”
Interest rates may be keeping monthly payments relatively affordable, but the big issue for young first-time buyers has been coming up with sizable downpayments when the average price of a home in the GTA is now more than $534,000 — more than $850,000 for a detached in the City of Toronto — almost double the $293,000 they averaged just a decade ago.
Saving can be especially tough when many first-time buyers are still paying off student loans and dealing with rents that can run from $1,100 to more than $2,000 a month.
Amy Tang, 36, was able to squirrel away enough of a downpayment for a $360,000 condo at Bloor and Jarvis, largely because of an inheritance from her grandfather and the fact she bought the 600 square foot one-bedroom unit in the preconstruction phase, giving her almost four years to chip away at the downpayment.
But a surprise, last-minute $100,000 donation from her Dad made all the difference, especially because she was changing jobs right as she was negotiating her mortgage with her bank.
“It was quite a lot on my own,” says Tang. “I don’t know how people do it without some help.”
Toronto realtor Andrew la Fleur says he doesn’t see gift letters as much as “gift condos” — parents looking to give their kids a foot in the market by buying them a condo.
He’s just started working with one suburban family who are looking to buy preconstruction condos in Toronto’s burgeoning West Don Lands area for their 32- and 34-year-old children, as well as a downsizing unit for themselves, all in the same project.
“It’s not like (the adult children) are living in their parents’ basement. They have jobs and are making lives for themselves. But the parents are looking at these condos as investments — they want to get into the market and they’re thinking it’s a way, at the same time, to help their kids get into a real estate market that’s very expensive.”
Demographer Andrew Ramlo, executive director of the Vancouver-based research organization Urban Futures, believes the cash flowing from boomers to their largely condo-buying kids could become every bit as critical to the health of the housing market — but just as impossible to quantify — as investments by foreign buyers who’ve been blamed for driving up house prices in Vancouver and Toronto.
“It’s something I really wish we had more data on because I suspect it’s had a very significant impact, especially on major urban housing markets, and will be with us for the next 10 to 20 years,” says Ramlo.
Tal cautions that baby boomer parents may find it increasingly hard to help out their kids to the extent that may be needed as house prices continue to rise.
While the biggest transference of wealth in history is likely to happen as boomers reach the end of their lives — billions from the combined wealth handed down by their frugal, wartime parents and the money they’ve amassed on real estate — that could be decades off, says Tal.
“Although many parents can help, they cannot help at a rate that is keeping up with the rate of increases in house prices.”