The downside of financings from the Bank of Mom and Dad
By Murtaza Haider and Stephen Moranis
Canadian parents and grandparents of means are stepping up as the unsung heroes of the real estate market, increasingly shouldering the financial burden to help their offspring secure homes. Withhousing affordability in a steady decline, aspiring young buyers short on down payments and income are leaning on their families to make their homeownership dreams a reality.
Unfortunately, while family financial support has benefitted some, it has exacerbated problems for others as those with parental assistance have been able to purchase larger, more expensive homes. The result — you guessed it — has been a rise in house prices, making properties even less affordable for those without familial support in an already strained market.
In a recent working paper published by the Bank of Canada, Jason Allen and coauthors explored the nuanced effect of family financial support on housing affordability. They found that while such cash transfers and loan guarantees are good for the recipients, they further worsen housing affordability for the rest.
Over the years, Canadian regulators have introduced various measures to instill discipline among lenders and borrowers. These measures include restrictions on loan-to-income and loan-to-value ratios and the implementation of stress tests. Beginning in 2016, borrowers of insured mortgages were required to qualify at a mortgage rate two percentage points higher than the negotiated rate with their lender. In 2018, this requirement was extended to include uninsured mortgages.
These measures erected new affordability barriers for everyone, but first-time home buyers (FTHBs) have been hit hardest. Unlike repeat buyers, FTHBs often lack the equity from a
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