‘Gift letters’ have become a common form of currency as young buyers struggle to save down payments

Susan Pigg – Toronto Star

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% of his younger clients — armed with “gift letters” or tens of thousands of dollars from their baby boomer parents.

Comment: I wish I had gotten a gift like that!

“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.

Comment: I had a client buy a $500,000 house with $350,000 from her parents. Not uncommon.

“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.

Comment: A lot of us call it “early inheritance”. Parents are simply giving some money early, money that they likely would have left to their kids when they passed.

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% 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.

Comment: I have seen parents helping their kids for longer than that. Maybe the amounts are higher now, maybe it is just more open. But help with down payments, co-signing, you name it. Parents have always helped their kids.

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.

Comment: Even letting kids live at home longer, to save up more, that is another form of help.

“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.

Comment: And yet I have young clients that have managed to sock away $50,000 themselves! The discipline some of them have, it astounds me.

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.

Comment: Yes, I have seen that as well. The parents buy it, then the kids make the payments. Or part of the payments. A lot of time it is for students. The parent sees the condo as a better investment than 3-4 years of rent. At the end, they can sell and make some money, the child could remain living their while beginning their career, or even rent it out to other students after their child graduates. It makes a LOT of financial sense.

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.”

Comment: And there is the coming level where children will not be able to afford their parents’ homes. I cannot afford my father’s house – it would go for over $1 million! That is going to put a lot of pressure on new generations – as boomers downsize and condoize, who can afford their homes? Even with two good incomes of $80,000 each, how is a couple going to be able to afford a $2 million Forest Hill home? I think we may also see a lot of gifting of houses outright. The parents will simply give the home to the child, while they buy a new place. Almost impossible to track, but I do wonder how much of that is going on.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
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