By Jane Hodges

Billy Lacher couldn’t have purchased his split-level home in October without a little help from an increasingly popular financial institution: The Bank of Mom and Dad.

The 31-year-old New York City firefighter and his wife put a 10% downpayment on the US$285,000 three-bedroom home, but his parents provided an additional US$20,000 (half as gift, half as loan).

Lacher’s not unusual. About a third of first-time buyers in 2011 got either a gift (26%) or a loan (7%) from their families to help finance their home purchases, down slightly from 2010, but consistent with assistance levels seen during the last decade, according to data from the National Association of Realtors (NAR).

But industry observers think the level of parental generosity is even higher, with some giving children money for home purchases so far in advance of a loan application that the gift isn’t disclosed to lenders, or, if they’ve got the resources, buying homes outright for their adult kids and setting up an after-the-fact intra-family loan agreement.

In November, all-cash buys among first-timers hit a high of 13%, according to Guy Cecala of Bethesda, Maryland-based Inside Mortgage Finance, a mortgage industry newsletter publisher and researcher. That’s up from 6% in 2009, when IFM first began tracking it. While the company’s surveys don’t ask about the source of cash, Cecala said that when first-time buyers buy outright, it’s likely their parents who are purchasing on the children’s behalf.

What’s encouraging these all-cash purchases now?  Home prices are way down – with the median price in November 2011 at just US$164,200, down 3.5% from a year ago, according to NAR. Mortgage interest rates, too, remain at all-time lows. According to mortgage researcher HSH, the average rate on fixed 30-year loans fell steadily from 5.1% at the start of 2011 to 4.09% in December.

Many first-timers use FHA loans,  requiring a 3.5% downpayment or 10% downpayment with poor credit, or VA loans, which require no downpayment, but are eligible only to military personnel.

Indeed, in some markets, without parental help, many first-time buyers wouldn’t qualify for the best rates or even a loan on the types of property for sale. To qualify for loans backed by Freddie Mac or Fannie Mae, borrowers need a 740 credit score and a hefty 20% downpayment  or else they’ll pay private mortgage insurance and additional “risk-based pricing” fees on their loan, IFM’s Cecala says.  As the government rethinks the role of the two mortgage giants, these tighter lending standards may be here to stay, or be tightened further.

To be sure, many baby boomers want to help. More than a fifth of them have co-signed a home loan for an adult child or given a gift or loan to help them buy, according to a September survey by Better Homes & Gardens Real Estate and Research Solutions Inc. More than half of those earning at least US$75,000 said they wanted to help their children finance a home purchase.

While this is all good and well, parents need to be mindful of IRS “gift tax” rules on gifts of more than US$13,000, and lenders may require signed documents from the parents guaranteeing that the money is a gift, not a loan. Under IRS rules, each parent may gift up to US$13,000 per year to a child, for a total of US$26,000. Each parent may also gift the spouse US$13,000 apiece, for another US$26,000, according to Rich Arzaga, a Certified Financial Planner and CEO of Cornerstone Wealth Management in San Ramon, California.

In the case of an intra-family loan for a home buy, the borrower is supposed to disclose to the lender that they are getting a loan, and the lender will then factor the future loan repayment into the borrower’s debt-to-income ratio, impacting their borrowing limit, according to Timothy Burke, CEO of Norwood, Massachusetts-based National Family Mortgage, which helps families create and document intra-family loans.

With loans, Burke advises parents and children to work with an outside party to draw up a formal loan agreement and repayment plan, and to record the loan locally as an added lien against the property. Doing so makes the adult child accountable but also turns the interest on the intra-family loan into one that’s tax-deductible as mortgage interest.

Cornerstone’s Arzaga generally discourages parents from helping their offpsring buy on the grounds that the parents may be doing a disservice to both themselves and their kids, especially if the kids aren’t ready to manage home ownership.

From a financial perspective, he says, parents may see more benefits from gifting than loaning money. On the gift front, since it’s unclear whether the floor for which estate taxes apply may drop from US$10-million now to US$1-million in 2013 – Congressional decisions are still forthcoming – some parents may want to gift their children money now to reduce future estate taxes.

Loans to kids, especially if converted into real estate liens, have fewer financial perks for parents, he says.
“Loaning money to children generally isn’t meant to be a financial decision,” he says.

Because interest that parents receive on loan repayments from kids is taxed as ordinary income, parents will pay from anywhere from 5% to 35% (depending on household income) in federal taxes, as well as state taxes, Arzaga notes. Since most parents who can loan money to kids are in higher tax brackets, this means they may be looking at paying the IRS 40 percent on every dollar of interest they get from their kids’ repayments. If parents are funding the loan with money otherwise earning low interest (say, in savings) they may make more in interest even with tax impacts. But generally, Arzaga says, loaning to children carries high risks relative to other investment options.

For parents like the Lachers, the decision to help a grown child buy is about market realities, and helping a relative gain favourable financing.

“This is the time to buy,” says Theresa Lacher, Billy’s mother, noting that her in-laws, too, had loaned her and her husband money to buy back when they were 25. “But buying a home is still expensive.”

John Shmuel

Canadian businesses are setting a cautious tone for 2012 as a precarious U.S. recovery and debt woes in Europe continue to weigh on the country’s business climate.

That was the picture painted by the Bank of Canada’s latest business outlook survey, which showed that while hiring intentions and equipment investment remain on track, credit conditions for Canada’s businesses tightened in the last quarter for the first time since 2009.

“It’s certainly a departure from what we’ve seen in previous quarters, which showed ongoing easing,” said David Madani, Canada economist at Capital Economics.

Twenty-eight percent of businesses surveyed said credit conditions had tightened in the past three months, compared with 23% that said they had eased. That marked the first time since the second quarter of 2009 that businesses did not report an easing in lending conditions.

But Mr. Madani said it would be premature to call this the start of an ongoing credit crunch for Canada’s businesses.

“What we’re actually seeing in this survey response is no further easing, rather than a tightening in lending conditions,” he said. “At this stage you can’t say there’s been a significant tightening in conditions, but first quarter data will paint a clearer picture.”

On the hiring front, the outlook for Canadian businesses was slightly more upbeat. Following a decline in hiring expectations in the bank’s autumn survey, more than half of businesses surveyed in winter said they expect to hire more employees.

Fifty-four percent of respondents said they will hire in the next 12 months, while 37% said they expect their work forces to remain unchanged. Only 9% expect to have a lower level of employment in 2012.

“It’s certainly one of the good news pieces in the report,” said Leslie Preston, economist at Toronto-Dominion Bank.

“But although it’s positive that more than half of employers noted they had intentions to hire this year, it’s dampened by the fact that it’s not widespread across the country,” Ms. Preston added, noting that many of the firms that planned to hire were concentrated in the Prairies.

Also helping to add a rosier aspect to the report was the outlook for investment in equipment and machinery, which was unchanged from the previous autumn survey. Some economists had worried that the previous report, which showed a scaling back in investment intentions, would possibly lead to a trend that could hurt economic growth this year.

“The investment outlook part is relatively important because the Bank of Canada, ourselves and most other forecasters are expecting at least a decent contribution from the investment side of things to help GDP along this year,” Mark Chandler, fixed income and currency strategist at RBC Dominion Securities, said. “It would be a bit disconcerting if that fell off.”

Another aspect of the survey that is most likely to provide a sigh of relief for the Bank of Canada is the outlook on prices for 2012. Inflation expectations for businesses continue to trend lower, according to responses in the survey. Balance of opinion shows that Canadian businesses generally expect their output prices to be slightly lower in 2012 compared with the previous 12 months.

Overall, Mr. Chandler feels that the report offers more good news than bad for Canada’s economy this year.

“When you look at the fourth quarter, we saw poor job growth over that period, as well as huge financial market volatility,” Mr. Chandler said. “So if you have that as your back drop, and you’re looking at these figures … I almost think of this report as having dodged a bit of a bullet here.”

ROMA LUCIW

Globe and Mail Update

You buy a duplex, get a mortgage, find tenants and collect monthly rent cheques. What could be easier?

With stock and bond markets spinning their wheels, many Canadians are looking for alternative places to park their money. And while buying an investment property might seem like a good way to diversify, you should do your homework before jumping into the housing market.

“Real estate investing is not for everyone,” says Vancouver-based Don Campbell, president of the Real Estate Investment Network.

“You cannot do it sitting in your basement in your pyjamas, like you can when you trade stocks. When you buy a property, immediately upon getting the key, you are running a business.”

Kurt Rosentreter, a chartered accountant and certified financial planner at Manulife Securities Inc. in Toronto, says the decision to buy an income property should be based on two factors: Once you subtract your mortgage and operating costs, will the property generate a steady monthly income? Secondly, will it appreciate in value?

Looking back, investment properties have by and large been financial winners, says Mr. Rosentreter. “In previous years and in most major cities, property values have doubled and the rental income is higher.”

But that trend may not continue. Interest rates have been sitting at record lows for some time now, fuelling a massive run-up in housing prices across Canada.

Mr. Rosentreter is concerned about what will happen to investment property owners saddled with large debt loads when interest rates inevitably rise. “If you are taking on a 20-year mortgage and interest rates hit 5 per cent, could this be a disaster for you?”

Moshe Milevsky, a finance professor at York University’s Schulich School of Business, says surging housing prices have created the potential for a huge downside. “The run-up has been great for anyone who joined this party a few years ago, but latecomers should beware.”

In his opinion, property investors are as vulnerable to economic shocks as those who choose to buy stocks. “If the unemployment rate spikes or real estate prices collapse, both of which happened in the U.S., then your income property investment will run into difficulties as well,” Mr. Milevsky says.

Some people view income properties as pillars of their retirement and financial plan, says Mr. Rosentreter. “They have heard all the good things – that you can raise the rent alongside inflation, that real estate values rise, and so on.”

What they fail to consider is their age. “If you are 55 and buying it with a full mortgage, it will never be a pillar of anything because you will be carrying debt through most of your retirement,” he says. “You need to buy these things young, or not at all.”

John Turner, the director of mortgages at Bank of Montreal in Toronto, says it all depends on how long you intend to hang on to your income property.

“If your time horizon is short, it might be risky and not worth it. But for the folks that are thinking long-term and looking for diversity in their investment portfolio … in my opinion, real estate is a sound investment.”

His advice for anyone considering becoming a landlord is to sit down with a financial adviser and see how what kind of role real estate can play in your overall portfolio. Crunch the numbers and figure out the tax and estate planning repercussions.

“You need to factor in maintenance, insurance and taxes,” Mr. Turner says. “You need to look at how much you need to put down and your costs, then figure out what your rate of return will be over the next five to 10 years.”

Mr. Campbell says the key to buying a successful income generating property is picking the right region – somewhere with looming job and population growth. “You really need to know where people are moving, where the jobs are.”

In Ontario, Kitchener, Cambridge and Hamilton are all good places in which to buy – as are Halifax and Winnipeg, he says. Edmonton and Calgary will be the big winners in the next few years, he adds.

Toronto and Vancouver, meanwhile, are riskier because it is more difficult for investors to generate a steady cash flow, Mr. Campbell says.

As for running the property, he believes hiring a property manager is the way to go, regardless of the cost. “If you manage them yourself, it can drive you crazy. Much like owning a small business, you hire a property manager to run your business and factor that cost into your budget,” he says.

“The real money is not made in the 7 per cent of the rent that you pay the property manager; the real money is made in finding good quality properties to add to your portfolio.”

By Julian Beltrame
The Canadian Press

Financial Post Staff

OTTAWA — Canada’s resale housing market tightened slightly in November, as sales rose in more than 50% of markets while the number of listings declined, the Conference Board of Canada said Tuesday.

Sales rose in 16 of the 28 markets the board tracks for its metro resale index, with seven of those markets posing a gain of more than five per cent over October’s number. Year-over-year sales rose in 15 areas, down from October, when 20 of the urban areas posted sales growth over 2010.

“The supply of new listings fell in 23 of 28 markets in November, but still exceeded year-earlier levels in 20 jurisdictions,” the board said. “An easing in supply of listings, combined with slightly weaker sales gains, lifted the sales-to-listings ratio in November in 23 markets. This left four areas as ‘sellers’ markets, while 21 remain ‘balanced’.”

The drop in listings resulted in higher prices in 17 areas month-over-month, while the year-over-year price was higher in 19 — with 16 markets recording growth of four per cent or more.

The Conference Board predicts all but three of the 28 markets it tracks for the index will see some increase in housing prices in the short term — the Ontario cities of Oshawa, London and Windsor being the exceptions.

Saskatoon and several Quebec markets — Gatineau, Montreal, Quebec, Sherbrooke, Trois-Rivieres and Saguenay — are expected to see the biggest increases in housing prices in the near term, the board said, predicting a seven per cent year-over-year gain.

A five per cent gain appears to be in the cards for Victoria, Vancouver, B.C.’s Fraser Valley, Calgary, Edmonton, Regina, Winnipeg, Halifax and Newfoundland, the board said. It expects housing prices to rise three per cent in Saint John, as well as the Ontario centres of Thunder Bay, Sudbury, Toronto, Hamilton, St. Catharines, Kitchener, Kingston and Ottawa.

JULIAN BELTRAME
OTTAWA— The Canadian Press

Demographic changes from aging to immigration flows are helping shape Canada’s housing market of the future, the federal housing agency suggests in its annual report.

The Canadian Mortgage and Housing Corp.’s study of housing trends sees continued demand for condominium and smaller homes, institutional buildings such as old age facilities, as well as a lively market for renovators.

The oldest of the baby boom generation entered retirement age this year, but by 2036, seniors will represent about one quarter of the total population in Canada, the report stresses.

That will mean more older households and more headed by single seniors, who will demand a different kind of residence from the two-story detached home they raised families in.

Condominiums already accounted for one-third of all starts in urban centres last year, compared with 29 per cent in 2009, but that trend likely will continue, says the CMHC authors.

“Aging households will support continued growth in condominium markets. We can also expect to see growing demand for home adaptations … (and) the number of seniors in institutions would increase by a factor of almost two and a half,” the report states.

The agency advises that it is not forecasting the future, but extrapolating what could occur based on current trends.

Ian Melzer of the CMHC’s housing needs policy group said overall Canada’s housing market will continue to grow, but likely at a slower pace than the recent boom years.

Although Canada’s birth rate remains below the replacement rate, the population is increasing faster than at any time since the early 1990s thanks to immigration. Last year, new arrivals swelled to 271,000, the highest in four decades, accounting for two thirds of population growth.

Most are moving to Canada’s three biggest cities – Toronto, Montreal and Vancouver – but less so than in the past. Last year, 63.8 per cent of immigrants landed in the three cities, compared with 72.7 per cent in 2001.

As well, home ownership rates, currently about 68 per cent, tend to be higher among seniors, although they will require different kinds of homes, or adaptations to current homes.

“Some will move into smaller detached houses or row houses, some will move into condo apartments,” Mr. Melzer said. He points out that Vancouver is experimenting with units as small as 300 square feet, which may be attractive to single seniors.

Seniors tend to stay in their current homes as long as possible, so many will likely choose to adapt their living spaces.

“Typically, young seniors are not living in accessible bungalows, so there will be renovations … installation of ramps or elevators, widening of the front door, bathroom doors. You might get replacement of bathtubs,” he explained. Another option is extensions to existing homes where seniors can live with their children.

The 184-page “Canadian Household Observer 2011” contains a number of surprising elements, although most of the report is based on previously released data. Among the findings: – Housing and related spending rose 7.1 per cent last year and now accounts for 20.3 per cent of Canada’s gross domestic product output, or about $330-billion – Super-low interest rates, coupled with a small inventory of existing homes for sale, helped push the average Multiple Listing Service price up by 5.8 per cent in 2010 to $339,042 – In 2006, only 35.3 per cent of recent immigrants (since 2001) owned their homes, compared to 68.7 per cent for non-immigrants. The CMHC notes, however, that home ownership among immigrants increases with their duration in the country.

– About 13 per cent of Canadians cannot afford a home in the area they live, a measure CMHC calls “core housing need.” Provincially, core housing need was highest in Newfoundland at 16.7 per cent, followed by Ontario and Nova Scotia at 15.1 per cent of households. Among cities, Toronto leads in core needs at 17.2 per cent, followed by Vancouver and Halifax at 16 per cent.

Still, the agency notes that 87 per cent of Canadian households “either live in, or had sufficient income to access, acceptable housing” in 2008.

The Bank of Canada and many economists have raised concerns about the level of debt, with household debt hitting a record 153 per cent greater than disposable income in the fall of 2011. The central bank said some households could be put under pressure when interest rates rise.

But the CMHC notes that 68 per cent of that debt is in mortgages and that most households can afford the costs associated with home ownership.

While household debt is a serious issue, the agency argues that a major shock to employment would constitute a much greater risk to Canadians’ ability to make mortgage payments than rising interest rates.

“Most Canadian households have the capacity to deal with adverse economic conditions, due to the high quality of mortgage credit in Canada, the substantial equity position of most Canadian homeowners with a mortgage, and households’ ability to adapt their discretionary spending,” the report concluded.