FEATURE-In hot Canadian market, parents hold keys to homeownership

TORONTO Mon Feb 3, 2014 2:44pm EST

TORONTO Feb 3 (Reuters) - Laura Parsons helped her son buy his first home four years ago, and she's ready to help her daughter do the same, making her part of what many say is a growing trend across Canada, where home prices have soared 84 percent in 10 years.

"I am going to give her the downpayment," said Parsons, 54, a mortgage banker in Calgary, Alberta, where an oil industry boom has pushed home prices to record highs. "We're the baby boom generation, we have more money than we ever thought we would, we have two incomes, we're saving, so I'm going to help."

Neither the government nor the real estate industry has collected data on parental aid to homebuyers. But experts say they are seeing more moms and dads helping their children, especially in the priciest markets.

"It is increasingly common in the city of Toronto, where prices are pressing the limits of affordability, for most buyers looking to get a foot into the market," said Steven Fudge, a sales representative at Bosley Real Estate in Toronto. The 25-year industry veteran says at least 50 percent of his buyers are bolstered by parental money.

A 2013 survey of 2,000 people for Bank of Montreal found that 27 percent of first-time buyers in Canada expect their parents or other family members to help them purchase a house.

That young adults need help with a first home should come as no surprise. Home prices in Canada hit record highs in late 2013, according to the Teranet-National Bank house price index. Industry data showed the average home price nearing C$400,000 ($358,800) in December. That's up 10 percent from a year earlier and 84 percent from December 2003, when the average price was C$211,768.

While the U.S. housing market is still recovering from a collapse in 2008 that triggered the global financial crisis, Canada's market never crashed. Partly that is because prices didn't rise as much during the U.S. boom, as Canadian lenders were more conservative than their U.S. counterparts.

Meanwhile, near-record-low interest rates over the past five years have helped fuel gains in prices.

Many forecasters predict a weaker market once borrowing costs begin to climb, and some warn of a U.S.-style crash. For now, though, homebuyers - and parents willing to help them - are plentiful.

Jackson Cunningham, a mortgage broker who specializes in first-time homebuyers in Vancouver, Canada's most expensive market, said some 75 percent of his clients get help from their parents, typically with the downpayment.

"Most buyers are maxing out their affordability," he said. "There is almost always a downpayment help from the parents. That's very common and completely acceptable at most lenders. Sometimes it is C$20,000, sometimes it is a couple of hundred thousand dollars."

Help from parents to buy property is common in many countries, and Parsons said her own parents gave her C$1,000 to help her buy a home when she was starting out some 30 years ago. But most observers say it is much more common in Canada.

Benjamin Tal, a senior economist at CIBC World Markets, said that is the result of house prices rising far faster than incomes.

The overall effect of parental aid on the economy is unclear, he said. While it has helped fuel demand for housing and kept upward pressure on prices, it could dampen consumption if it means the parents have to cut back on their own spending to help their kids.

Most important, Tal said, the wealth of the baby boomers and their willingness to help their offspring likely provide a cushion in case of economic shock that might otherwise prompt a wave of mortgage defaults, and even a housing collapse.

"The increased share of this kind of activity is giving the housing market some more room to maneuver in case of an economic shock," he said.

"What makes something bad is if it is unsustainable. Is this sustainable? Probably. In fact, it is more stable than anything else that I can think of. So I think it is a good thing."

INHERITANCE NOW

Tal and Parsons, herself a mortgage lender for Bank of Montreal, both say it makes sense for parents to help with the downpayment, leaving the mortgage payments to young home buyers, who would otherwise be paying the same monthly amount in rent. While Canadian house prices are so high as to make downpayments unaffordable, mortgages rates are near historic lows.

Buyers in Canada must put at least 5 percent down on a home, and can only avoid costly mortgage insurance by putting 20 percent down.

A typical two-story house cost an average of C$422,800 in Canada, C$652,700 in Toronto and C$851,200 in Vancouver as of the second quarter of 2013, according to the RBC Affordability Index.

Real estate agent Fudge said helping the children allows parents to pass on wealth while they are alive, avoiding taxes while getting to see the result of the inheritance.

"It's a strategy on the part of the savvy parents. By gifting the money, most of them are saying to me, 'We don't want our children to have to pay tax on their inheritance. Why am I waiting another 30 years for my kids to get the money when I die, when it can be put to use now?'"

Parsons, who with her husband has given each of their children about C$18,000 to buy or prepare to buy their first homes in Calgary, said making a downpayment - but not helping with monthly mortgage payments - just makes sense.

Before her son, a mechanic, bought a house four years ago, she set him up to pay rental income in an apartment the family owned, training him to get used to a monthly payment.

"To have their own house is the best building block they can start with. My fear is they will rent a lot longer than they should just because of the fear of homeownership," she said.

"After all, I can't take it with me when I go."