With housing prices rising faster than many Canadian buyers can keep up, one banking executive warns parents that assisting their children with a down payment may only be a short-term solution.
“With the housing market pricing many Canadians out of the market, younger generations are forced to turn to their parents to close the gap,” said Rick Lunny, President and CEO, Manulife Bank following the release of the company’s latest debt survey.
Lunny went on to say that while this option can help young buyers get over the initial hump of a large down payment, it may not go as far towards covering costs if interest rates rise as predicted.
“Although this can be an effective short-term solution, it can actually be exacerbating the problem. That’s why it’s so important to have financial flexibility, especially when it comes to purchasing a home, no matter the financial environment.”
According to the Globe and Mail, the average home price has jumped more than 30% during the COVID-19 pandemic. Prices have increased even faster in Toronto suburbs and other Ontario cities.
The Bank of Canada recently warned Canadians that while interest rates will most likely rise soon due to their current, record-low levels, they can’t guarantee the same about home prices.
“Some people may be thinking that the kind of price increases we have seen recently will continue. That would be a mistake. Interest rates are very low. That means there is more potential for them to go up,” Bank of Canada Governor Tiff Macklem said at a news conference in May.
As a result of the increased prices, parents have stepped up to help their children break into the housing market. Over a third of homeowners said in the recent Manulife Debt Survey that they needed help from their parents to purchase their first home. These numbers are closer to 50% for millennial and Gen-Z homeowners.
However, the story isn’t over end when the purchase is complete. More than 60% of Canadians have reported that their cost of living has increased over the past year.
This leads many experts to wonder if parents’ generosity may set up young homeowners for financial stress down the line. While new homeowners may initially be able to purchase a home at a very low rate, the likelihood of rates rising may make it more difficult for them to afford the mortgage payments on their home in a few years.
“Some of the vulnerabilities that we had before the crisis have come back and top of the list is vulnerabilities related to housing and household indebtedness and they have intensified,” Macklem said.
Even a small increase in rates might be enough to bring this scenario into reality.
“If interest costs were to go up one to two percentage points, because of the level of debt, households could be put in a position where they’re devoting a significant share of their income to making their mortgage payments,” says Diana Petramala, senior economist at Ryerson University’s Centre for Urban Research and Land Development told Global News.