Blog by Mark Longpre

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Intergenerational Mortgages?

There's usually a grain of truth in most jokes. But how seriously should we take the musings of Patricia Croft, the retiring chief economist with RBC Global Asset Management, who spoke about the inflated Vancouver housing market to an audience of about 1,000 real estate executives this past week? The gist of her comments was that prices and affordability had eroded so much in Vancouver that consumers might turn to intergenerational mortgages. No such mortgages exist in Canada. The idea behind them is the parent passes on the equity in their home, as well as the debt. Usually the mortgages are interest-only -- a practice currently banned for banks regulated by Ottawa. Reached by telephone the next day, she chuckled, agreeing she was being a little mischievous by throwing out the idea of a mortgage you pass on to the next generation. "But how do people even afford to buy their homes?" asks Ms. Croft, noting that Royal Bank of Canada's latest affordability index shows it takes 66% of pre-tax household income to carry a Vancouver bungalow. That's 60% above the national average. "We've been saying something has to break in Vancouver for a long time, but it is a special market in terms of location and desirability," Ms. Croft says, adding offshore investors have driven up prices. "They actually had intergenerational mortgages in Japan. When you passed on, you passed on the mortgage. If any city would qualify to market it, it would be Vancouver," she says. Gregory Klump, chief economist with the Canadian Real Estate Association, says the entire affordability measure doesn't make as much sense as it used to. "The whole price-to-income measure is flawed," Mr. Klump says, adding so many high-end properties are trading because of wealth as opposed to income. "If they are paid for with wealth, you need to reset the whole metric," he says. Vince Gaetano, a vice-president with Monster Mortgage, says inheritances are driving up prices in the market. Even those who don't have the cash now are buying homes and amortizing their mortgages for a period of time long past retirement in the hope someone will die and leave them money. Mr. Gaetano doesn't think the Canadian consumers would take to the intergenerational mortgage. "We've been down that road and stopped it," he says, referring to the government ban on interest-only mortgages and the lowering of amortization lengths from 40 years to 35 years. In some parts of the world, there has been little choice but to turn to longer amortization because it's impossible for the average consumer to pay their home off in their lifetime. Tony Loughran, head of customer services of England-based Kent Reliance Building Society, which is similar to a credit union, says his company has been providing intergenerational mortgages in the United Kingdom for about four years. "The mortgage goes on in perpetuity," says Mr. Loughran, who adds that customers simply pay the interest during their lifetime. "There is a niche for them. If property comes too expensive, it's a way to buy it and then pass it on to the younger generation who might find prices beyond their reach." Don Lawby, chief executive of Century 21 Canada, says Vancouver residents continue to scramble to afford product. Sometimes that means borrowing from family or creating a rental suite to offset carrying costs. "People will do what they have to do," says Mr. Lawby, who can't see a market for a mortgage product people pass on to their kids. "People in Canada want to pay their mortgages off. That's the way we are in Canada." People might want to, but in Vancouver that is becoming more difficult if they don't go into the market with a lot of equity. Average prices in the city are $576,597, up from $539,600 a year ago. So, yes, it's a leap to suggest intergenerational mortgages will come to Canada. But it's also a stretch to say the average consumer can afford to carry a mortgage in Vancouver with a 5% down payment. Read more: