March 14, 2015
The transfer of wealth between generations is an increasing factor in local real-estate transactions – whether that family is Canadian, Chinese or otherwise
In the past couple of weeks we’ve seen how Greater Vancouver’s house prices are on a seemingly unstoppable upward trajectory, with the real estate board reporting that February benchmark prices are up 6.4 per cent year over year for homes sold on the MLS, and sales up 21 per cent compared with February 2014.
But what’s driving this rise in house prices? We all know that investment from overseas (mostly mainland Chinese) buyers is a major factor. But is that the only factor?
Some facors may be in this well-publicized editorial about the three key reasons why many Vancouverites are also able to afford the city’s high real estate prices. But there is one crucial factor that we haven’t delved into, and that is wealth transfer within families.
Here’s what’s happening in increasing volumes. Baby-boomers (aged 51-69) have been seeing their parents die and inheriting their estates – paid-off homes and investments that have increased massively in value. The thing is, the baby-boomers are already well established and have their own real estate assets – indeed, this is Canada’s wealthiest generation ever. So many of them don’t really need the inheritance for themselves, and look instead to help their own children – Gen X and, to some degree, Y.
These 21- to 45-year-olds are the fortunate beneficiaries of a considerable amount of cash from the sale of such estates, meaning that they are often putting huge down payments on their own homes. That makes these homes suddenly affordable to those younger people, despite what might be fairly average incomes. (Another reason why the oft-maligned median-income-to-house-price ratio is largely irrelevant – more on that in the aforementioned affordability editorial, and also here.)
Keith Roy, a Realtor with Macdonald Realty, has been talking to BNN on this very topic (watch the video here). He points out that the International Monetary Fund (IMF) is raising red flags over the increasing numbers of uninsured mortgages, but what that actually means is that more and more people are putting down more than 20 per cent and therefore don’t need to insure their mortgage. Surely this trend proves there is increasing personal equity in the market, which equals stability – not the opposite? Roy is seeing a lot of inheritance transfer from baby-boomers to their offspring, driving up local prices. More parents are helping children buy real estate. As long as the parents are gifting the money, it’s not calculated into their total debt service ratio.
Chris Catliff, CEO of BlueShore Financial in North Vancouver, agrees. He says that his credit union has seen an increase in the number of parents who use their equity to help their children buy into a detached-home neighbourhood. Admittedly, some of these are wealthy immigrant home buyers, but not all of them.
More supporters of the wealth-transfer theory are seasoned industry veterans Tsur Sommerville, a professor at the University of British Columbia’s Sauder School of Business, and the Condo King himself, real estate marketer Bob Rennie. In a 2014 speech to the Urban Development Institute, Rennie said wealth transfer between generations is increasing and will help to keep real estate demand in Vancouver strong.
What does all this ultimately mean for the Vancouver market and would-be home owners? Four things.
- Despite mediocre average salaries in the city, there is considerable additional wealth behind the scenes that is making high-priced real estate affordable for a considerable segment of regular folk.
- Local house prices are not likely to go down any time soon, as the market is well supported by that wealth.
- Even on the off-chance of a soft landing for the market, prices are likely to go down considerably less than 20 per cent, which means most homeowners will not go into negative equity, despite the IMF’s scaremongering.
- That if you’re not on the property ladder right now, you should take advantage of current low interest rates to buy into the market, as prices are likely to only rise. (And if you don’t have inheritance to fall back on, buy further out in more affordable areas to build equity.)
Happy house hunting!
- See more at: http://www.rew.ca/news/editorial-wealth-transfer-driving-vancouver-house-prices-not-just-overseas-buyers-1.1791066#sthash.SButUUTW.dpuf