Gift letters blowing the bubble?

Gift letters blowing the bubble?

Gift letters blowing the bubble?

Parents in Toronto are funding their millennial kids’ first real estate purchases in record numbers, helping first-time buyers get a leg-up in an increasingly unaffordable market; and one well-respected industry voice believes the trend is contributing to the GTA’s oft-refuted housing bubble.

“What does this transfer of unearned wealth mean? For starters, it sucks off equity from inflated Boomer houses and injects it into those of their children – perpetuating the bubble,” Garth Turner, author, investment advisor and former Member of Canadian Parliament wrote on his blog, GreaterFool.ca. “Second, it effectively defeats the efforts of governments to cool off the very housing fire that they stoked with cheap money, federal loan insurance and juicy buyer incentives.”

Turner was referring to a Toronto Star article that states, according to one mortgage broker, that 75 per cent of young buyers do so with the aid of a gift letter. Though that number may be slightly inflated.

“I’d say it’s more of a 50/50 ratio; we are seeing some significant gifts from family members and it’s giving them a head start when buying their first house,” Drew Donaldson of Safebridge Financial told MortgageBrokerNews.ca. “I do expect (the trend) to continue.”

However, the actual percentage is of little consequence; it’s obvious a large portion of the market is being bolstered by buyers brandishing gift money. Something the often sardonic – yet legitimately concerned -- Turner believes is a major problem.

“Ironically, by perpetuating the bubble, by thwarting market forces and by shielding their offspring from economic reality, Boomers may be setting up their kids for a mama of a future correction,” he wrote. “Without porky income gains and a job resurgence, the day of reckoning will arrive anyway.”

Deputy Chief Economist of CIBC World Markets weighed in, saying he believes the market would not be as booming were it not for this phenomenon.

“The market would have been much weaker if we didn’t have this phenomenon,” he said in the Toronto Star article. “There’s no question about that. 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.”

And if it weren’t for the recent measure to reign in the housing industry, the number of these buyers would be incrementally higher.

“We treat all first time home buyers the same but if someone is living paycheck to paycheck and they’re buying with a gift, we advise them about unknown costs,” Donaldson said. “The CMHC and the government have done a good job limiting who can attain a mortgage.”

8 Comments
  • Kent Farnsworth 2013-11-07 8:31:23 AM
    There is certainly no bubble in Atlantic Canada. It would make sense for the federal government to consider regionalizing lending regulations. It is frustrating that national mortgage lending rules are pretty much based entirely on what is happening in two cities... But regarding this "bubble" in Toronto and Vancouver, I think that a bigger issue is the millionaires coming from foreign countries and paying cash for properties is a much larger issue than gift letters. That is something that should have been "regulated"a long time ago.
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  • Ron Miller 2013-11-07 8:42:39 AM
    @Kent Farnsworth...

    I sort of agree. Just wonder what the issues would be if Canada tried to stop foreign investment.
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  • Kent Farnsworth 2013-11-07 8:53:00 AM
    It's not that I think foreign investment is a bad thing. But foreigers buying up a significant amount of the residential properties in a major city is one of the biggest reasons for the increase in property value. probably less in Toronto than in Vancouver.
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