Regulating the Bank of Mom and Dad

Canada's policymakers, both at the Department of Finance and the Bank of Canada, have taken steps in recent years to prevent the housing market from overheating.  Most notably, downpayment requirements were notably increased, in an effort to ensure that first-time buyers were not enticed into the market by low initial carrying costs, only to run into trouble when mortgage rates began to rise again.  This has remained a largely theoretical risk until now, and with the Bank of Canada set to stay on the sidelines for many more months yet, it's likely to remain that way for some time,  but the concern is a valid one.

Although home prices in Toronto and Vancouver have still managed to rise to dizzying heights, these measures have for the most part had the desired effect.  Canada has avoided the banking system problems that have afflicted most other developed nations, and the rapid growth in personal indebtedness that was in evidence before the financial crisis has decelerated sharply.

There is, however, one lender that the regulators have no power to influence: the Bank of Mom and Dad.  And as this article in the Toronto Star explains, loans or gifts from parents, or even outright purchases of starter homes by baby boomers for their offspring, are a major factor at the more affordable end of the housing market in Canada's largest city.  CIBC economist Benjamin Tal asserts, doubtless correctly, that the support provided by parents to get their kids into their first home is the key reason why first time buying has remained resilient in the face of tightened mortgage rules.

There's a paradox here, though.  Imagine that the Bank of Mom and Dad had never existed, and all of that baby boomer moolah had not flowed into the housing market.  Starter house prices would surely have moved sharply lower, almost certainly to the point where the kids would have been able to afford their first home through the more traditional combination of their own savings and a bank mortgage.

So the Bank of Mom and Dad stands charged with keeping house prices artificially high and maybe giving the Governor of the Bank of Canada a few sleepless nights.  Still, although you have to feel sorry for young people whose parents aren't in a position to give them a hand up, the implications for the housing market are probably positive.  Unlike the banks, Mom and Dad are unlikely to demand their money back at the worst possible moment, which suggests that the risk of a sudden correction in house prices has been somewhat mitigated.  Sadly, though, neither the regulators, nor the banks, nor Mom and Dad seem to be doing much to solve Canada's real housing problem: a lack of construction of affordable, purpose-built rental units in the larger cities.