Doug Norris, the chief demographer at Environics Analytics, had a problem in the 1990s that baby boomers are increasingly facing today: a 20-something still living at home.
“My daughter went off to college, finished university and then had a hard time getting a job so she came back home,” Norris recalled. “But not only did she come back home, she brought her boyfriend who also didn’t have a job with her. They both moved in with us.”
The solution offered by Norris’ wife? “She told them to start paying rent in two months or you’re gone and (they moved out),” he said and laughed. “I’m not sure whether we would have actually forced them to move out. But it was another way to get them to move out. You help out or you start paying rent.”
It all worked out, Norris now has three grandchildren and his daughter has her own house.
Some millennials — and their parents — today aren’t as lucky and that’s helping to drive up home prices in major markets such as Toronto and Vancouver.
Realtors call it a type of gridlock. Detached home prices have soared past $1 million and become out of reach for young buyers. As a result, more children are moving back home and that forces their parents to stay put, cutting down on the supply of family-friendly homes. Reduced supply drives up prices further, putting even more young adults out of the market.
Statistics Canada data from the 2011 census showed 42.3 per cent of Canada’s 4,318,400 young adults (20 to 29) lived in their parents’ home either because they never left it or because they returned home after living elsewhere. That figure has dramatically risen from 32.1 per cent in 1991 and 26.9 per cent in 1981.
In metro centres, the numbers were even higher. For example, 56.3 per cent of young adults were living at home in Toronto. Housing prices in Canada’s biggest city have almost doubled over the past five years, so the problem is expected to be even worse when the 2016 census data on the subject arrives.
“Absolutely, boomers not downsizing is part of the problem,” said Dianne Usher, senior vice-president at Royal LePage’s Johnston & Daniel Division.
An obvious solution is to give millennials more money. A CIBC study published in June 2016 found Canadians can expect a $750-billion windfall from their aging relatives over the next decade.
Of course, not every son or daughter is going to inherit enough to put a down payment on a house. Some parents who want their kids out ASAP will just have to be a bit rude and give them the boot.
But for parents with money, the question is: How do they use it to get their millennials out of the house? Here are five tips.
This might be the most controversial way of getting the kids to move. Gifting someone a house or even a down payment goes against the grain of a make-it-on-your-own philosophy, but there is little doubt it’s a growing segment of the market.
A study from Mortgage Professionals Canada released last fall found 15 per cent of first-time homebuyers between 2014-2016 received a gift from their parents or family members to help them make the purchase. That percentage was up from 10 per cent in the 1990s.
The old Bank of Mom and Dad doesn’t even seem to require repayment. Only three per cent of first-time homebuyers received a family loan compared to six per cent in the 1990s.
But Janet Boyle, vice-president of real estate at the Bank of Nova Scotia, cautions that people getting support to make a down payment still remain the exception not the norm.
“It’s not a regular occurrence and remember it’s very market dependent,” she said. “You take the (Greater Toronto Area) or (Greater Vancouver Area) out of the equation and this probably isn’t happening with the same level of frequency.”
Some parents outright buy homes for their kids, in many cases downsizing to a smaller house for themselves to help pay for it, but Clay Gillespie, a financial planner and managing director of Rogers Group Financial, cautions against it.
“As long as the parent is not impinging on their ability to maintain their retirement or lifestyle, I don’t care,” he said. ” My objective is for them to make sure their lifestyle is not at risk.”
He adds that if you have access to money, it makes sense to give it your estate beneficiaries ahead of time.
Gillespie suggests if you are not on title with the property, take a mortgage on the property in case your child gets divorced. “The problem if you own title, you start messing up the principal residence (exemption),” he said.
Toronto real estate lawyer Bob Aaron said if you’re trying to protect your wealth from a child’s marital breakup, being on the title might not be your best answer. He suggests a prenuptial or cohabitation agreement.
“If you have loaned your children money, you can also put that on title as a mortgage,” said Aaron, adding the banks will sometimes not allow any secondary financing, so that option might be blocked.
Rents in Canada continue to rise. A report in January from Urbanation found average rents for Toronto condos reached a record $2.77 per square foot in at the end of 2016. Based on an average leased unit size of 719 square feet, renters must come up with $1,990 every month. Nationally, average rents were $995 a month and rising 3.4 per cent in a year.
A New York Times story published in February reported that 40 per cent of those between 22 and 24 are getting help with rent from their parents to the tune of an average US$3,000 per year.
“I’ve heard of parents giving kids a $10,000 Christmas gift,” said Aaron, noting that the money could be used for housing costs. “When I wanted my kids out, I said, ‘We’re going to buy you a condo.'”
This option has proved popular with students and has driven some of the sales activity in university towns such as Kitchener-Waterloo, Ont., but also in major cities like Toronto and Vancouver.
“This happens with a lot of our foreign buyers,” Usher said. “The foreign buyers want to get their money into Canada and their children into Canadian schools. They buy property based on the school system.”
The key consideration in this play is who will be on the property title. Putting it in your child’s name means he or she will be using it as a principal residence and, therefore, avoid any capitals gains taxes if the property’s value has risen by the time it is sold.
Gillespie notes if you buy the property as an investment and your kids pay close to market rent, you can write off the mortgage.
“As long as the rent is income, then you’ve got a deduction,” he said, adding competitive market rent is open to interpretation.
“Absolutely this happens,” LePage’s Johnson said. “It happens a little more in a suburban environment or a rural environment, but sometimes you will build a secondary dwelling on the property.”
A few developers have even starting catering to this trend in urban areas by building basement “in-law suites” that are legal and not subject to being shut down by the municipality.
More importantly, the income from these suites could ultimately help a young buyer qualify for a mortgage they might not otherwise be able to afford.
“Many years ago, we used to see in-law suites all the time (though not necessarily legal),” Usher said.
He adds that it doesn’t necessarily have to be an in-law living there. The general idea is that young buyers will be able to generate income off a part of their home that they don’t occupy.
Financial Post
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