THE GREAT WEALTH TRANSFER

Everybody is talking about the wild surge in real estate prices in the last few years.

For the first time in decades, the real estate market was part of every federal party’s platform during the recent federal election. Historically, many have blamed foreign investors looking to shelter their wealth in a stable and free economy. Lately, it’s been speculators who are to blame – they are snapping up new homes and condos with the anticipation of future gains being locked in. Of course, this was all at the expense of the millennial generation, who were being priced out of the local real estate market just as they are coming into their prime home buying years.

That’s the story we’ve been hearing – but is it the full story?

COVID has certainly parted the curtain on some of these myths. Lockdowns and travel restrictions have shown that foreign buyers haven’t been flocking to our market, and certainly haven’t been buying up gobs of real estate in small markets like Guelph.

It appears that a large part of this market is being driven by the millennials themselves. It’s no secret that the boomer generation are sitting on a pile of wealth, and are expected to transfer approximately $1 trillion dollars over the next decade or so.

There was a report created in 2006 by the Rennie Marketing Group in Vancouver that showed the value of mortgage-free real estate in Vancouver was $123.8 billion, with 47% of that being held by owners aged 55-74. That number has increased to almost $374 billion today, and the amount held by boomers has jumped to $205 billion.

What I am certain about is that in most real estate markets across Canada, there are similar ratios of debt-free real estate. The boomer generation has been paying off their mortgages, downsizing to smaller homes and are now sitting on a pile of cash – and in a lot of cases, using it to give their children a major leg up.

This is evident in the number of first time buyers who are showing up with 25-30% of the purchase price in cash, which makes their mortgage payments a lot more affordable, or gives them the ability to purchase a more expensive home.

Just a few years ago it was rare to see parents gifting or co-signing on mortgages. In today’s market, many of our mortgage partners tell us that well over 50% of the mortgages they process include gifts or forgivable loans, and have more than 5% total down payment.

Previous generations typically didn’t pass on their wealth until their passing. The boomer generation has been much more savvy about wealth building, and are less inclined to wait to pass their wealth to the next generation. The result has been a lot of wealth is being transferred to the younger generation to finance home purchases, and avoid estate taxes down the road.

Accountants call this being tax-efficient!

You would be mistaken if you think Ottawa hasn’t noticed this trend as well. To date, the Federal government has spent over $240 billion on COVID-19 relief, and at some point that bill is going to have to be paid. You can be sure that governments will be looking at ways to tax this wealth in some form or another, which will be a further incentive for the boomer generation to re-distribute their wealth before the politicians find a way.

The impact of this wealth transfer is being felt in real estate markets across the country, and I suspect it will for some time to come.

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