Canada is making a triumphant return to feudalism, where homeownership requires family wealth. A CIBC Capital Markets analysis shows 30% of first-time homebuyers received a down payment “gift.” Not a little help either, but it was the primary source of funds for the majority that received a gift. It’s now occurring at such a scale, it might be driving home prices higher.
Nearly 30% of Canada’s First-Time Home Buyers Received A “Gift” For Their Down Payment
Buying your first home in Canada isn’t hard. You just work hard, save up, and then ask your parents for the money, right? Well, that’s how it works for a large share of first-time homebuyers today.
The share of first-time homebuyers receiving a “gift” for a down payment is huge. Nearly 30% of first-time homebuyers received a gifted down payment. The share increased by almost 10 points since 2015, which is a huge demographic shift. Imagine if an extra one in ten adults under 40 needed their parents to help them cross the street? It would be obviously visible, not just a fringe amount. Now that’s not the total, just the increase in people who received help. It sounds small, but it’s HUGE.
Canadian First-Time Home Buyer Gifted Down Payments
Those that received help also REALLY needed it. Down payment gifts were the primary source of funds for two-thirds of those that got help. For those not into banker’s riddles, primary funds for one in five first-time buyers were gifts. It’s unclear how many of those gifts showed up in hockey bags from a casino in Vancouver. That’s a different article though.
The Average Gifted Down Payment Is $82,000, Up 58% Since 2015
The average gifted down payment was HUGE. First-time buyers received an average of $82,000 this year, up 58% from 2015. When isolating buyers where the gift was the primary funds, that number swells to $104,000 in 2021. That’s a whole house in parts of the US, but just the help first-time buyers receive across Canada.
Canadian Homeowners Receiving Help With Moving Up
The Bank of Mom and Dad Have Expanded Into Upgrades
The bank of mom and dad must be looking to grow, because they’re into getting into “move up” purchases as well. The bank found 9% of homeowners upgrading received a downpayment gift in 2021. The average gift for these folks was $128,000, a fifth larger than the average first-time buyers’ gift. This is one of the more odd trends, considering these were existing homeowners.
Existing homeowners should have benefited from the recent boom in prices. Their equity increased, and should have offset the down payment. To not see the boom translate into enough for a down payment is strange. At best, it means the gap between classes is widening even faster than home prices can grow.
On the upside, there are fewer gifted down payments going to existing homeowners. It appears to have peaked in 2017. That was when everyone in Toronto and Vancouver thought Canada was about to run out of land.
The Rise of Gifted Down Payments Helps To Push Prices Higher
Rising home prices and gifted down payments demonstrate a strong correlation. Home prices can only rise as fast as people can find money, which is why credit influences prices. If you want to sell your home for $1,000,000 and there are no qualified buyers, the price comes down. Not if your buyer gets a down payment boost, either through the bank of mom and dad or the government.
CIBC found the size of the average down payment grew faster than home prices. Over the past decade, home prices increased an average of 9.7% per year. Gifted down payments grew about 2 points faster over that same period. The additional capital more than likely helped to push home prices higher.
Canadian Real Estate Prices and Down Payment Gifts
Source: CIBC; CREA.
Naturally, this trend is stronger in more expensive cities like Toronto and Vancouver.
A Quarter of Toronto’s First-Time Home Buyers Needed Family Help
Homebuyers in Toronto are receiving huge down payment gifts from their family. CIBC estimates 24% of first-time buyers received a gifted down payment, up from 13% in 2015. The average gift received is a whopping $175,000, up from $125,000 over the same period. Both the rate and size of gifted down payments have been soaring over the past few years.
Toronto Real Estate Buyers and Gifted Down Payments
Those moving up also received help from family, but it was a much smaller share. About 7% of buyers upgrading their home received a family gift, up from 5% in 2015. The average gift they received was a massive $250,000, up from $140,000 over the same period. Fewer people need help upgrading, but those that did, received a lot.
Vancouver First-Time Home Buyers That Needed Help From Family, Got An Average of $210,000
Vancouver home buyers received a similar level of growth in gifted down payments. The share of first-time homebuyers receiving a gift for their down payment reached 23% in 2021, up from 13% in 2015. The average gift reached $210,000, up from $160,000 over the same period. Monster growth for both the share of people getting help, and the size of help.
Vancouver Real Estate Buyers and Gifted Down Payments
Fewer households received help upgrading, but received a lot of help. About 4% of buyers moving up in 2021 got family help, down from just over 5% in 2015. The average gift they received was $450,000 though, up from $275,000 over the same period. That’s about a hockey bag filled with $20 dollar bills, for those that need a visual.
Down payment help isn’t a new thing, but the scale at which it’s occurring is. Only a fool would knock parents for trying to help their kids. Who wouldn’t? The issue is more so to do with the moral hazard facilitated by the government.
People are more likely to take gifts because the probability of losing the money is low. Kids are more comfortable taking money they won’t lose. Parents are more comfortable giving away large sums of money if they know it won’t be squandered. As long as the perception of home prices only rising exists, the size leverage increases. In their opinion, it’s practically risk-free.
The whole mania is kind of funny, to be honest. Parents need to give their kids money for a downpayment… because parents keep providing funds for down payments. It’s inflationary, and its existence is perpetuated by its own existence.
There’s also the fact no one thinks twice about a downpayment coming from family. Even in a province currently in the middle of a money-laundering inquiry. But once again, that’s another post for another day.
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