#Down payments are less affordable than ever–unless you have generational wealth

Thirty-four-year-old Brooke Sanchez picks up her one- and two-year-old daughters Cali and Capri from daycare at 5:30 p.m. every weekday and drives home to the four-bedroom house in Vaughan, Ont., that she shares with her husband, Luis, her sister Brenna and her friend Tracey.

The girls play with their toys around the kitchen while Sanchez cooks dinner. Brenna pops in and out, and sometimes Tracey—who mainly resides in the basement, where there is a kitchen, bedroom and bathroom—comes up too.

Brenna and Tracey are not especially hard to live with, and they’re not lacking for space, says Sanchez. But sometimes she just wants to be alone with her husband and kids. “Like [Brenna and Tracey] are up drinking wine on a weeknight, and I have to get up early because I have two kids—I just don’t want to hear it,” Sanchez says with a sigh.

Luis is a senior sous chef at the Ritz-Carlton in Toronto, and she’s the manager at a tattoo removal company. During a normal year, their household income totals some $170,000. But when COVID hit, Luis was out of work.

There was a silver lining: with a lower household income in 2020, the Sanchez family qualified for Canada’s First-Time Home Buyer Incentive, where the government of Canada puts down five per cent toward the cost of a down payment, recouping the equivalent percentage of the value of the home in 25 years, or when it’s sold. To qualify, household income must be under $120,000, or $150,000 in Toronto or Vancouver.

READ: Nowhere to buy

For the Sanchezes, eager to find a place of their own, the timing was perfect. But since their household income was still above $120,000, they were bound to Toronto, rather than the more affordable outlying markets. More disheartening was the size of the bank-backed mortgage they would qualify for—$585,000, which certainly wouldn’t get them a detached house, considering the average price of a family home in the city has surpassed $1 million. “We’re not going to move into a bachelor, or a one-bedroom condo,” Sanchez says. “We were completely priced out. The program didn’t work for us whatsoever . . . like, it’s literally for single people who don’t need a lot of space.”

The Sanchezes have no other option but to wait and save—adding to the $21,000 they already have—while paying for two kids in daycare (some $2,000 a month). Sanchez flip-flops between buying a home with her sister and trying to do it on their own.

They are a prime example of a family caught in a housing affordability crisis affecting young first-time buyers­—even those in the top 10 per cent of earners in Canada. So if people with six-figure incomes can’t afford homes in big cities, who can? Nowadays, working hard, hustling and doggedly saving aren’t enough: increasingly, the one reliable ticket to home ownership is generational wealth, wrapped in a down-payment gift from mom and dad.

Gonzales (right) with her mother and son: a mix of resentment and buyer’s remorse (Photograph by Carmen Cheung)

The condo renters

House hunters: A journalist and a mechanical engineer
Household income: $180,000+ a year
Wish list: A two-bedroom Toronto townhouse for $830,000
The plan: Saving $80,000
Down-payment gift: None

My husband and I are in the same predicament as the Sanchez family. We have a one-year-old son, and we currently rent a 700-sq.-foot, one-plus-den condo that we will grow out of soon. According to Statistics Canada, we are in the top five per cent of earners, making $179,800 or more. And with two stable jobs in our chosen fields (journalism and engineering), excellent credit scores and minimal consumer debt, it’s hard to understand how we can’t afford a home in the city where I was born and raised.

We spoke to a mortgage broker recently, who said we’d qualify for a property worth $830,000, which would get us a two-bed, two-bath townhouse about 20 minutes east of the core. On properties worth $500,000 to $999,999, buyers need to put down at least five per cent on the first $500,000 ($25,000) and 10 per cent on the value remaining ($33,000 in our case), plus closing costs, which includes things like land-transfer tax in Ontario (around $18,000), legal fees and title insurance. In sum, we’d need at least $80,000 in cash. On homes over $1 million, the down payment jumps to at least 20 per cent of the purchase price.

Though there are government incentives for first-time home buyers—the home buyers’ tax credit ($5,000), and the home buyers’ plan (withdrawing up to $35,000 from your RRSP tax-free)—housing has become almost unattainable for the middle class in recent years. In 2021, Canadians spent 52 per cent of their gross income on the cost of housing, up from 45 per cent in 2016, with the average being greater in big cities like Toronto and Vancouver. During this time, the cost of housing rose 15.3 per cent faster than incomes did. That’s the highest it’s been since the 1980s, when mortgage rates were well into the double digits.

MORE: Five charts that will define Canadian real estate and housing in 2022

Which is where down-payment gifts come in. A recent CIBC Economics report stated that there was $10 billion worth of down-payment gifts in Canada’s housing market in 2020 alone, with average gifts of $130,000 in Toronto and $180,000 in Vancouver.

In the past year, about 30 per cent of first-time home buyers received down-payment gifts from family members, and 66 per cent of those people said the gifts were the primary source of their down payments. Gift amounts, which hit a record average high of $82,000 nationally, have risen by an average of 9.7 per cent per year over the past five years, outpacing home-price inflation by two per cent.

In Saskatchewan, Alberta, Nova Scotia, Quebec and New Brunswick, 20 to 27 per cent of first-time buyers received a gift in 2021. Not surprisingly, it’s most prevalent in Ontario and British Columbia, reflecting the inordinate average down payments—$140,200 and $159,700—in those provinces.

Ottawa-based economist Miles Corak, a professor at City University of New York, uses the word “luck” as it relates to his research on labour markets and intergenerational income mobility. “If you’re coming of age in the 2000s, you’ve probably done everything right,” explains Corak. “You work hard at getting an education, you put off family formation, you’ve got some savings, you’re interested in getting into the labour market and the housing market. Even if you’ve done everything right, you could be lucky—or unlucky.”

“Lucky” might mean landing the perfect job—say, getting hired at Shopify before its IPO. But the other dimension of luck, Corak adds, is family background at a time when the rich have been getting much richer. “So the bank of mom and dad is also helping some of the lucky [ones] to get a foothold in the housing market,” he says. “And again, [this could be] someone with the same education, the same [career] background, the same drive and energy, who—because of the buildup of inequality—now has more financial resources.”

I come from a working-class immigrant Filipino family; my dad worked as a ground crew at Air Canada and my mom as a clerk for the Ontario government, where they remained for their entire careers. We lived modestly but they provided me with everything I needed and more—I was debt-free after completing my undergraduate degree.

In my 20s, instead of working, saving and buying property, I travelled a lot and pursued a master’s degree. But I was not one of the “lucky” ones. I graduated with a low-paying marketing job and $40,000 in student debt, so I worked a second job as a freelance writer.

Reflecting on all of this triggers a mix of resentment and buyer’s remorse, for both the big things, like the graduate degree and the amount we spent on a wedding, and the smaller purchases—$20 for sushi lunches, a $120 coat from Zara, a $50 fig bush for the apartment. If I hadn’t bought all those things, would I be able to afford a house by now?

“Our culture likes to imply that [young people] are not working hard enough,” says Paul Kershaw, a University of British Columbia professor who studies the evolution of standard of living in Canada. “If you didn’t drink so many lattes, or have so many pieces of avocado toast [or] that new cellphone, then you too could be a homeowner. They’re working hard; what’s not working is the system they’ve inherited economically that is not rewarding their hard work in the same way.”

Bullen and her dog, Yogi: ‘I’m grateful my parents were able to provide that support’ (Photograph by Jimmy Jeong)

The lucky millennial

Homeowner: A youth program manager at a non-profit
Household income: $65,000 a year
What she got: A 600-sq.-foot condo in Vancouver for $480,000
Down-payment gift: Over $180,000

Alexis Bullen, a 34-year-old from Vancouver, received a substantial down-payment gift. She makes $65,000 at her job as a youth programs manager for a non-profit, and with the gift she was able to buy a 600-sq.-foot condo near Vancouver’s Pacific National Exhibition for $480,000. Her mortgage payment is under $1,000 a month.

“I’m grateful for how my parents were able to structure their lives to provide that kind of support,” Bullen says. “We grew up middle class; a lot of [my parents’] wealth has come from real estate. It’s not like they were lawyers and doctors; they both worked at the [University of British Columbia]—my mom was an office administrator and my dad was in e-learning.”

Bullen’s down-payment gift was higher than average for Vancouver due to multiple windfalls. Her late maternal grandmother bought a 2,100-sq.-foot, one-bedroom home in Dunbar, an area in West Van where three- and four-bedroom homes are currently selling for some $3 million. Bullen’s grandma bought it for just $7,000 in 1956, and it was paid off in 13 years. In 2017, the house was sold for $1.8 million. Bullen’s parents, Mark and Rochelle, bought a home in West Point Grey for $550,000 in 1994. It used to be considered a middle-class North Vancouver neighbourhood. In 2011, they sold it for $2.4 million.

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Among baby boomers they know, Rochelle says it’s a given that people who have the ability will help their kids. “[We didn’t want] our kids to wait until we were dead to be able to get on further with their lives,” she says. While they don’t talk about details of down-payment gifts with their friends, they know plenty of people their age who have given one. But the gift doesn’t necessarily sit well on the conscience. “We’ve benefited hugely from real estate, but it is unfair to younger generations,” says Mark. “We’re perpetuating the problem by getting our children into the market and passing on this wealth while there are so many other people who just can’t afford it . . . there is guilt.”

Kate MacPhail, Bullen’s realtor, says at least 70 per cent of the first-time buyers she works with receive down-payment gifts, and she’s never seen one under $50,000.

“I don’t want to sound pessimistic,” says John Pasalis, president of Realosophy, a real estate brokerage in Toronto, when he’s asked how young people are supposed to enter the market. “They can’t.”

Earlier this year, Pasalis heard from a family who had saved $100,000 for a down payment, but their income was in the low $100,000s, maxing them out—based on the size of the loan they could get from the bank—at a purchase price of $750,000. “When I looked at what they could afford, it was basically nothing [that resembled] a three-bedroom family home. Not a detached, a rowhouse or anything,” he says.

For the Sanchez family, a down-payment gift isn’t in the cards. Sanchez grew up in apartments, and so did Luis. They were both raised in single-parent households—Sanchez’s mother worked at Walmart and Luis’s mom was a personal support worker. They’ve been together since they were 18, moving to Toronto from Hamilton to go to college and build their careers.

“We moved to Toronto for our jobs,” Sanchez says. “Now—if we can afford to buy—we have to move so far out of the city and spend less time with our kids because of the commute? It makes no sense.” With their household income back up after the pandemic pinch, the Sanchezes are trying to save $55,000 for a down payment and closing costs. They hope it will be enough to get them a three-bed townhouse for $650,000 outside the GTA.

Kershaw, who is also the founder of Generation Squeeze, a political advocacy group for young Canadians that emphasizes generational fairness when it comes to the cost of housing, believes that taxing homes over $1 million is part of the answer to the affordability crisis. The organization, with funding from the Canadian Mortgage and Housing Corporation, released a report in January recommending an annual progressive surtax on homes over $1 million (nine per cent of Canadian homes, mostly located in Ontario and British Columbia) that could be deferred to the time of sale or inheritance. The surtax would reduce the tax shelter on principal residences and disincentivize home ownership as a means for wealth accumulation. Revenue collected by such a surtax, the report states, could go to housing subsidies for low-income households, green co-ops or purpose-built rentals.

Those will sound like radical measures to anyone already in the housing market. And it’s no surprise that the political will to make such fixes is, to put it mildly, lacking. “We need at least to be able to say that to restore affordability for all, we need home prices to stall so that earnings have the chance to catch up, and we don’t yet have any provincial or federal government courageous enough to say that,” Kershaw says.

READ: This is how Canada’s housing correction begins

For now, those without the wealth to launch them into the housing market can only hope for a long-overdue market correction. When it comes to handing over your life savings to buy a home, “I would be very prudent,” says Pedro Antunes, chief economist at the Conference Board of Canada, who predicts a downturn could be coming. Some of the money Canadians saved during the pandemic ($210 billion in 2020 compared to $50 billion pre-pandemic) was used to buy homes. Mortgage debt has soared to $2 trillion. And with mortgage rates and inflation rising, and government COVID support ending, increased debt will become a burden on households.

A recent survey conducted by Sotheby’s Realty on 18- to 28-year-olds in Toronto, Vancouver, Calgary and Montreal found that 50 per cent of Gen Zs have given up on owning a single-family home, citing the challenge of saving for a down payment while paying for living costs as the top financial barrier. Unlike me, it seems Gen Z is already woke to the idea that home ownership may not be part of their future. “Academics talk about coping strategies, and one is changing your sense of identification,” Corak explains. “You can rent forever, you can leave Toronto, you can do all sorts of things, but they require an adjustment in your self-identity. Why do you have to do this? Bad luck?” He pauses. “Luck of the draw.”

This article appears in print in the February 2022 issue of Maclean’s magazine with the headline, “The down-payment hustle.” Subscribe to the monthly print magazine here.