I was in the car with clients today and one of them asked, “Do you think the end of quantitative easing by the government is going to have an effect on the market?”
I’m going to have to answer that question a lot in the coming days.
The words “quantitative easing” appeared in a multitude of newspaper headlines this week, for example:
In the Globe & Mail:
In the Wall Street Journal:
In the CBC News:
More news coverage is on the way, and then will come the columns on how an interest rate increase in 2022 will lead to lower real estate prices.
Except that it won’t.
I explained to my clients that I believe many of the “standard” or “time-tested” measures and metrics used to forecast the real estate market are no longer valid in today’s world, and that textbook thinking doesn’t always play out in reality. The idea that higher interest rates will lead to lower housing prices is exactly that: an idea. It makes perfect sense in a textbook, in theory, in a conversation among economists, and in a vacuum. Many of you are going to call me out for saying this, but talking about “higher interest rates” in regards to a 25-basis-point increase in the fall of 2022, and then trying to make a bearish argument on the Toronto real estate market, is a stretch.
I further explained to my clients that over the last few years, I’ve argued that we can no longer look at debt-to-income ratio as an indicator or predictor of real estate trends, since, to be blunt, poor people don’t buy houses. People who rack up consumer debt and credit card debt are not in the housing market, so the idea that a national debt-to-income ratio of 170% being a red flag for the housing market has been a misnomer for over a decade.
I have also argued that the time-tested, much-believed-in indicator of the market, called “ratio of wage growth versus real estate growth” is also an out-dated metric.
Well, because there’s been no greater transfer of wealth in the history of modern civilization than the dough that Baby Boomers have gifted to their kids. So if real estate prices in Canada are going up 10% per year, but wages are only going up 3%, the idea that this is unsustainable, based on historical precedence, is inaccurate.
How much money parents are giving to their children to use as a down payment for their real estate purchases has been a topic of much debate.
We’ve long speculated, but this week, CIBC Economics put out a great report which boils it all down, and specifically includes data on Toronto and Vancouver, in addition to the country as a whole.
Since I started writing this blog mid-week, I’ve already seen the story picked up by multiple media outlets, which have provided their condensed version of the story. So I figured we should simply look at the entire report rather than getting bits and pieces from BlogTo, Posthaste, et al.
HERE is the PDF if you want to download.
Here is the report in full:
October 25th, 2021
Gifting for a down payment – perspective
By Benjamin Tal
It is hardly a secret that home buyers are increasingly turning to parents for support. But how big is this phenomenon? Using CIBC data, the following brief note sheds some light on that issue.
The share of first-time home buyers that received help from family members was just under 30% during the past year. Note that this is not a new phenomenon as that share stood at close to 20% in 2015 and has risen gradually since then, alongside home prices. Interestingly, the share of first-time home buyers receiving help did not rise during the pandemic (Chart 1, left).
As for the size of the gift, in 2015 it stood at just over $52,000 and has risen steadily since then. Note, however, that while the share of gift receivers did not rise during the pandemic, the average gift has risen notably to reach a record high of $82,000 (Chart 1, right).
First time buyers are not the only ones receiving gifts. Just under 9% of mover-uppers also receive help. While that share has been on a declining trend (Chart 2, left), the size of the gift has risen dramatically to reach $128,000 in September 2021 (Chart 2, right).
As illustrated in Chart 3, the average size of a gift is highly correlated with home prices. In fact, over the past half a decade, growth in the average size of gift outpaced home price inflation, averaging 9.7% per year—a full two percentage points faster than growth in home prices.
No less than two-thirds of first-time buyers that received a gift indicated that the gift was the primary source of their down payment (Chart 4, left).
Naturally, here the gift is more substantial, averaging $104,000 for first-time buyers and no less than $157,000 for mover-uppers (Chart 4, right).
Overall we estimate that over the past year, gifting amounted to just over $10 billion, accounting for 10% of total down payments in the market as a whole during that period.
By province, the most expensive provinces naturally see the largest share of gifting (Chart 5).
Zooming in on Toronto and Vancouver, Charts 6 and 7 illustrate the dramatic increase in gifting those cities.
The average gift in Toronto during the first 3 quarters of 2021 is now estimated at more than $130,000 for first-time buyers while mover-uppers enjoyed a gift of almost $200,000. In Vancouver, those gifts are even larger, averaging $180,000 and $340,000 respectively.
How do parents come up with this money?
The narrative is that many of them get themselves into debt to support their kids.
The evidence, however, questions that assertion. Based on Equifax information, we estimate that only 5.5% of gifting parents use debt to finance gifting. That rate is higher than seen in 2019 but it’s still relatively low (Chart 8).
No surprise, the highest share of parents using debt to assist are in Vancouver and Toronto. Therefore, it seems that a large portion of the gifting comes from parents’ savings, which of course grew notably during the pandemic— allowing for the increases in the size of the average gift.
Given the trend and the size of gifting, it is clear that this phenomenon is becoming an important factor impacting housing demand and therefore home prices in Canada.
As for the impact of wealth inequality, clearly gifting acts to narrow somewhat the wealth gap between gifting and non-gifting parents.
At the same time, however, gifting clearly works to widen the wealth gap between receivers and non-receivers. That increase in the gap is much larger than the actual gift size as it might make the difference between owning and not owning a house, with receivers potentially benefiting from future home price appreciation.
Furthermore, gifting also works to reduce the size of the mortgage and therefore leads to significant savings on interest payments over time.
That’s it for me, have a great weekend, everybody!