God forbid they’d actually have to save…

How to buy your kids a house

This is the title of an article in the Financial Post from this weekend.  Chalk this one up to a sign of the times.

Many Baby Boomers have paid-for homes, while their grown children are contemplating entering the housing market. Instead of letting them rent during their first foray after leaving the nest, it’s tempting to buy a second “investment” property with Junior as the main tenant.

Fully 10% of Canadian parents are considering this, according to TD Canada Trust

But what’s interesting is that the article goes on to mostly discuss various ways to structure the mortgage so that the kids DON’T pay rent and instead wind up with a house that the parents have essentially subsidized.

Jamie Golombek, managing director, tax, with CIBC Private Wealth Management, favours a zero-interest mortgage, which is “easy, tax-effective and guarantees mom and dad can get their money back should they wish.”

Alternatively, you could waive principal repayments during the course of the mortgage; ultimately, the parents forgive the debt entirely, essentially gifting the loaned funds to the child.

Lord forbid they actually SAVE for a down payment, manage their finances accordingly, and then build their wealth without mommy and daddy holding their hand.  Take off the training wheels and cut the cord already!  Is it any wonder we have a generation so absolutely clueless about how to manage their money?

Consider these previous posts:

Canada:  A country of marshmallow eaters

Are we really this dumb?

How did we get here?

Interestingly, the fantastic personal finance book, ‘The Millionaire Next Door‘ by Stanley and Danko termed this type of behaviour “Economic Outpatient Care”.  They observed that when the children of wealthy parents need a continuous influx of income from their parents to support their desired lifestyle, several things occur:

1)  The children typically do not end up with anywhere near the same level of wealth accumulation as their parents.

2)  The wealth of the parents tend to last only one generation, being squandered by the children.

3)  The parents themselves end up with considerably less wealth than their wealthy peers later in life.

Beware of this.  We have a generation of relatively clueless individuals when it comes to managing finances.  We also have a younger generation that increasingly views their parent’s home (which typically took them a lifetime of hard work to own) as the new ‘starter’ home.  Our expectations of what we are entitled to and what is ‘normal’ is extremely anomalous in the context of our own Canadian history.  I’ll suggest that this will not last as the credit bubble that has allowed this new mindset to exist by providing the means for young home owners to purchase larger and nicer homes than their parents is now on borrowed time.

Cheers,

Ben


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22 Responses to God forbid they’d actually have to save…

  1. Gary says:

    Ben,

    I’m always checking your websites for updates and new postings. you’ve consistently provided analysis and commentary. I applaud the information that you’re providing the community.

    About this post particularly, it resoundingly sounds like it is becoming the norm. I completely agree that boomer parents are feeling like they have to coddle their kids when they themselves had to mostly manage on their own when growing up in Canada. What is the social phenomena that causes this feeling of responsibility?

    From personal experience, I am 26 and I have heard my father talk about holding a condo so that I could live there with my fiance. I vehemently protested for him to sell his RE. Luckily for me he listened and has recently liquidated property.

    I’ve also successfully convinced my spouse-to-be that right now is a dangerous period to own property because of the precarious nature in recent global developments. It was only since late 2008 that our entire financial system was ready to collapse. Looking at the numbers we’re not in any normal recovery I’ve read about in history. This is an artificially induced fantasy state where cans are kicked down the road and previous transgressions fail to be corrected. Expectations of prosperity continue to grow without any new innovations or true value added to the economy.

    Parents giving money to their kids or subsidizing risky asset purchases without planning for retirement is probably one of the worst ideas I’ve heard yet. This could effectively cause an even bigger misalignment in our society as the kids squander their inheritance early while boomers think that they are “safe” with a paid off home. They usually fail to even think about calculating after tax income for retirement years and increases in tax and energy price inflation. Also, if things come too easy for young adults at at early age they won’t truly learn the value of working hard now to raise income-earning potential and they’ll fail to invest savings wisely to minimize risk.

    The prevailing mantra of the boomer generation has been “housing never goes down” which has raised animal spirits to dive head first into overpriced assets. With housing bull market since the late 90’s it’s hard to argue with facts and figures that project an imminent correction. The older generations tend to be set in their ways and only trust what they have seen with their eyes. I’m afraid that most boomers will find themselves in a bad situation once this downturn plays itself out. If the assets they hold cannot reliably produce stable income until the end of life expectancy they should not be holding it at this point. If their kids do not need to own a large home at this point in their life why take on correction risk, pay extra taxes, insurance, utilities, repairs at the beginning of their lives? It doesn’t make any sense! House prices cannot continue to increase forever! RE moves in cycles just like any other asset class. Why risk hitting a trough in your retirement age? Get rid of it at peak evaluations! That was six months ago.

    Ben, keep up the good work!

    regards,
    Gary

    • Sams Mango says:

      “Luckily for me he listened and has recently liquidated property.”

      Gary – why are they lucky for selling? What if values raise?

      • Gary says:

        Sams,

        I’m sure anyone that’s analyzed compulsive disorders like addiction to gambling would be able to express the never ending cycle of hoping for hopes sake. Sure, it is possible that prices can keep rising in the near future. However, is it a probable course of events? All the facts that present themselves in the last year and are evident for the foreseeable future project a drawn out housing correction. It takes a bit of interpretation from available data but it’s all there if a rational mind considers all the signs. Dealing with long shot “what ifs” is a slippery slope to financial ruin especially if you don’t compare upside to downside risk adjusted returns.

        I consider him lucky for being able to sell the condo recently with a profit without ever having intention to rent it out. The condo completed in November and he was able to close the sale in December. It was originally a speculative purchase made by my brother and since he moved to Seattle and declared non-resident, my dad took it over. It’s luck because timing the market at this point for profit would truly be a fools game. I’m certain that the bull market has already ended from recent data with sales volumes dropping to record lows. Also as per the Teranet index it shows a pretty strong reversal 6 months ago. The next shoe to drop is the amortization change which will further reduce borrowing capacity of the masses. This a credit contraction event and will serve to reduce money flowing into the housing asset class. Sure, it affects the marginal buyer at first, but lowering the confidence in the asset class is the first step. The recent media reports of stagnant prices won’t help to quell fears of negative cash flow for X number of months without appreciation to offset holding costs.

        Overall, credit contraction+ increasing rates = lower house prices.

        When the trend will reverse back to positive is hard to say. We’ve hit a bit of a flattening in recent months due to a bit of a dead cat bounce from the upcoming rule change and people looking to buy the initial dip. However, look for more inventory to come online and outpace buying interests by a large margin in the next few months.

        Prices will invariably move lower due to supply ballooning as demand remains tepid.

        Nothing is ever 100% sure in life but being successful usually involves taking real life discrete data, interpreting it and then making decisions ahead of the curve. If you genuinely think that house prices in aggregate can keep moving up higher from this point and decide to try and profit from that belief. I would definitely say to you “good luck”. Local factors can sometimes come into play while this correction plays out but actually profiting from it would usually require insider knowledge. Outsiders will have already bid up the price.

      • Sams Mango says:

        so he sold and bought another place or is he renting?

  2. Sams Mango says:

    Anyone have a link this mortgage scheme? Zero Payment

  3. BBC says:

    Gary,
    Well said!

  4. Dmitri says:

    Gary – agree. It’s much better to skip couple of month worth of gains than to suffer a few years of losses.
    (and at less then 4% of growth a year (for the past year), the gains are simply not worth the risk)

  5. mac says:

    Gary,

    You sound like a nice kid with good values. But you’ve got all your ducks lined up in one row, the one pointing to imminent collapse. Are you planning to go to UBC? Look around you. Condos are selling like hotcakes to Chinese parents. They buy condos just to get their kids close to university.

    Friends of mine are bemoaning that their two very bright, studious children might not be able to attend UBC when they grow up as they don’t have the same discipline their Chinese friends have and that they themselves won’t have the money to help their kids reside closer to UBC. They live in Richmond. Quite the commute to UBC.

    Kid, what you’re espousing are Western values. The trend is going the other way. Chinese foreign students, the local Hong Kongers and Canadian-born Chinese buy condos for their kids. They coddle their kids in exchange for dedication to their studies. Your father is right to concern himself about it because you will be competing with these kids for jobs. Bold statements about Western values, however good they may be, and speaking one language just doesn’t cut it anymore. And selling his condo right now in Vancouver… dunno… did you drop by the recent condo showrooms at Kits 360? YVR square footage to be built for 2013 priced at $725/sq ft. with the nicer units coming in at $1,000/sq. ft. and they are SOLD. 3/4 SOLD at opening weekend.

    On another of my favourite anecdotal indexes, all you Vancouver bears… take a look at all the Vancouver restaurant bankruptcies. The majority of them Western-style restaurants by far. Most replaced by….? I’ll let you guess it. As more and more grandmas and grandpas sell out to Mainlanders who either send wife and kid to live there or leave the house empty because it’s just a chip on a roulette wheel, there are less people in each of the old Westside neighbourhoods to stroll over to the high street and support the old skool local shops and Western style restaurants. Tipping point coming soon.

    • Sams Mango says:

      Already tipped Mac- best to learn what they want and get it first

      • Gary says:

        Mac I am Canadian-born Chinese. I agree this is a prevailing attitude that parents buy their children property. However, old Chinese parents are just as susceptible to asset deflation and fiscal woes just like any other individual. It is even worse when retirement is on the horizon and global markets are in retreat. With highest average debt and negative savings rates in Canada do you really think that most parents would be able to foot the bill for paying their kids condos as well as planning for retirement? This will be a short lived trend as each younger generation of parents are incurring debt at exponential increments. These occurrences are anecdotal and there isn’t much data supporting that droves of individuals are doing this. Even if Chinese restaurants are popping up, this is a post hoc ergo propter hoc argument. There is no causation to ever-increasing house prices. Sure it speaks to how a local area might have changing culinary tastes but it doesn’t provide reliable data that would back up Hot Asian Money. If anything, it might indicate that more middle class Chinese are being employed in the area to work low paying service jobs. What I’d like to see if how many of these low paying service jobs have spawned asset purchases of up to 700,000 dollars or more with how much times leverage.

  6. mac says:

    I can’t touch the condo pre-sales. I hear they rapidly go back on sale in the Mainland and that’s the main driver for the market. To flip to other Chinese back home now that gov’t there is determined to end speculation. I’m not part of the culture and don’t have the connections or speak the language. I’m assuming you do. And you can make a lot of money that way as everyone is desperate to get their money out of country.

  7. Pat says:

    Not one of my favourites of your articles. Big on lamenting the next generation (as humans have done forever), low on any concrete evidence.

    Any backup supporting your assertion that this generation is any less financially literate than the last? Despite plenty of lazy kids and dumb parents, I’d bet it’s the opposite.

    • Debt to PDI at 150% with a huge surge in wealth-sucking 35 year ams certainly provides anecfotal evidence.

      • Pat says:

        Not of a change in the overall level of financial literacy (or anything to do with the younger generation) – just that more of the financially illiterate are blindly jumping into mortgages and other sources of debt. As in the US, there has been a massive push from government and the private sector over the last few decades to promote home ownership as a Good Thing, and as a result many new demographics are now in the real estate market (and leveraged to the hilt). I don’t think these demographics sat on the sidelines in the good ol’ days because they were financially literate and prudent – they just weren’t marketed to, and couldn’t get 35-year zero-down mortgages.

        It is an ever-recurring fallacy to call out the next generation’s differences as the fatal flaws bringing down our society. Sure, there are some great anecdotes of spoiled kids in today’s Canada, and they face a different social and economic climate than 30 years ago, but on the whole they’re better-educated and more resourceful than their parents.

  8. raw facts says:

    Hey Mac.. how about all the other vacant condos on sale? Shall I list a few that have remained unsold? Pre-sales always create interest because of the speculative nature in the city. It sure seemed great for the buyers who waited in line for good ole olympic village. What are they down about 30-50%. It was a frenzy there.
    Also, “same discipline as there chinese friends have” what is that suppose to mean? Richmond long commute? Poor kids have to take transit? Have you heard of the B-Line?
    Cut the BS.
    Up or down this has been going on in Vancouver for a long time.

  9. mac says:

    Raw,

    If you mean lots of condo inventory, I agree. Vacant condos? As in knock-knock no one is home. I used to think that was a “sign” too. That was 8 years ago. The people who own these vacant condos obviously don’t have the financial concerns that come from earning a local income and holding an empty property.

    Pre-sales always create interest because of the speculative nature of the city? I agree and think we are saying the same thing only I’m saying that now speculation is not from this city. And the part that is is being resold in Shanghai next day. Adding to speculation on top of speculation. This is what my old realtor told me, adding that he believes values won’t hold up for local resale. But then again, my old realtor congratulated us on a 10% price increase in 2002 and said, “Don’t expect that to happen again.” He also stated that houses have gone so far above their fundamental valuations that he expects a crash eventually. So he’s been right. And wrong. And he doesn’t know the future either.

    You want me to “cut the BS” on quoting what friends said to me? Shall I phone them? Do you want their number so you can talk them out of their thoughts about their own children? I just listened and repeated what I heard. Don’t shoot the messenger. They’re feeling the pressure to buy a condo for their kids to go to university in 9 years from now. They know they won’t be able to do it and it worries them. Just like it worries Gary’s dad. They see the competition and don’t know if their kids will be able to hack it and from all the parents and kids I know, their kids are by far the brightest.

    • Gary says:

      Mac,

      you seem like a swell guy

      However, when it comes to rationally evaluating the VC market you’re falling incredibly short.

      How is it rational to believe that prices will keep increasing to a plane where nobody middle class earner can afford to live there and prosper without dumping 99% of their income on housing costs? Where would the middle class exist in this made-up world? What kinds of goods and services could you provide to people spending 99% of their income on housing? if your answer is the rich asians will serve the rich asians. Does it seem likely that a rich asian will become the barista at starbucks working 9.95 an hour while daddy and mommy from shanghai subsidizes the rest of their living expenses just so that said rich asian can be a barista for the rest of his/her life? Okay well maybe your argument is that she becomes a bank manager. Fine, but where are all the clients in the local economy when the savings rate is negative and income after expenses is near zero. How can the bank make money off of these local branches? This is especially true if most of the money is offshore. Sure this is not happening today. but what you are saying is that there is no limit to how high prices can go relative to the middle class income. If you admit to a limit then you’ll have explain why we’re not at that limit.

      There’s an interesting case study for a city that reached epic proportions of stupidity when it came to spending money on RE development and expecting a new paradigm to lift it from its unsustainable nature. Dubai. If you think that Canada would have a Chinese Dubai on national soil…I dont know what else to say.

      Once you think about the big picture you’ll realize how flawed all the arguments are about a new paradigm and this time is different. The housing market is largely built off the backs of the middle class within the Canadian economy. All anecdotes are just that anecdotes. Unless large pockets of Canada have decidedly become vortexes operating outside of physical and natural law things will correct themselves eventually. With the heights things are at right now it would be sooner rather than later. It’s like watching a helium balloon rise up into the atmosphere. Would you want to leverage up to take bets that it could go further after it has already gone 10,000 feet? You are already at the tail end of the probability distribution curve in it’s achievable height; yet you would still bet on it going even higher?? There is clinical help for people that would keep gambling with borrowed money at that point.

      It’s not about whether parents would WANT to buy homes for their kids. Sure, everyone would like to be rich enough or have enough available credit to do such things. But can a trend like this continue forever with parents eventually unable to feed themselves? This is highly improbable and with retirement statistics slapping us in the face it’s easy to see how unlikely this trend would propagate.

  10. mac says:

    Gary,

    Is it OK to reply to your post after reading only the first two lines? London. Centre of London. W1, S1, E1, N1. It must have more real estate than all of Vancouver Westside and look what’s happened there. Virtually no non-landed gentry or Englishman can afford it. Maybe they could get a sliver of an apartment.

    Wait! I’ve decided to read on. Q&A format if you don’t mind:

    You: …nobody middle class earner can afford to live there and prosper without dumping 99% of their income on housing costs?

    Me: … We’re there already. And you’ve just described central London and the 16th arrondissement of Paris for that matter and parts of Manhattan. (I know someone will whip out RE graphs of price declines in England, France and NY, but I urge you to read further into central London).

    You: …Does it seem likely that a rich asian will become the barista at starbucks working 9.95 an hour?

    Me: No. They come here to study then go home to work in dad’s company, get married, etc., commensurate with their wealth… the rich ones that is. The poor ones buy all the housing in the dumpy areas of South Vancouver, Richmond (before now) etc and work within their community. You’ve seen them at restaurants making far less than 9.95$/hr. Plus, the wealthy UBC student types find there are no jobs here.

    You: …Okay well maybe your argument is that she becomes a bank manager. Fine…

    Me: It’s not fine. The local folk don’t really hire the Astronaut kids. Their English isn’t always good enough and if you’ve ever been on the outside coming in to this province, you’re in for a treat. The myriad ways the locals have of keeping foreigners out is amazing and by foreigners I mean anyone from another province. Try bringing your Queens University teaching degree here or your UK electrician’s license. If you like being starved out, you’ll love it here. So the “mythical rich asians” aren’t facing anything new.

    You: …How can the bank make money off of these local branches?

    Me: LOL!

    You: …his is especially true if most of the money is offshore…

    Me: Go and read VREAA’s recent blog post. A Chinese family declared only $4,000,000 to the Canadian gov’t and then got panicky because they wanted to bring the rest of their money out of China, all one hundred million more. Unsubstantiated story but if you need more stories why not call the local building inspectors and ask who they’re working for lately. I had a conversation with one today who is famous for hating real estate agents, the construction code, everything about the real estate industry I was shocked when he told me about how much money he is seeing in RE purchases from his clients in in the last two years. All he does is inspect 3M houses for people who don’t live her. He is shocked and dismayed and said it’s practically incomprehensible to people like you and me.

    You: …but what you are saying is that there is no limit to how high prices can go relative to the middle class income…

    Me: Certain areas will no longer be for the middle class. Or scratch that. They will be but the middle class will live on the main thoroughfares in high rises. You’ve seen that before, no doubt, when you look around every city. There’s the ritzy neighbourhood and there the people who still want to stay in it so they live in the condos above, say, Yonge St. at Yonge & Eglington. Am I saying the “average” Canadian in Vancouver will find out he is a below-average earner in the global marketplace? Yes. And that the above average student at UBC is well below average on a global scale? Yes. If Vancouver is in a bubble, it’s in a I’m-Special-Here bubble which is now being burst. But if you’re from somewhere else you knew that the moment you stepped off the plane.

    You: … If you think that Canada would have a Chinese Dubai on national soil…I dont know what else to say.

    Me: No words necessary.

    You: …Once you think about the big picture you’ll realize how flawed all the arguments are about a new paradigm and this time is different.

    Me: I agree. It’s never different. One day there will be a correction of sorts to the local real estate market in China. You’re waiting for that? Chanos says it’s coming. Roger’s says, so what. Their economy is much bigger than that. China is opaque. No one who doesn’t speak the language understands exactly how it works. We’re not invited to the table. You get that. Once the correction happens, to the alleged 60% of the economy that is based on building empty cities, do all the factories that manufacture everything, and I mean everything, I see on my messy table before me shut down? I’m looking down. My boots were made in China, the zippers that close them, the socks underneath them and the rubber soles too. I’m sure my pants and underpants are made in a close-by factory.

    You: There is clinical help for people that would keep gambling with borrowed money at that point.

    Me: You better get those shrinks overseas then. I agree these people need help. They are bidding up SFHs past the point of common sense. I posted on this blog six months ago that the market would continue to bifurcate. That we would see an uncomfortably large rise in SFH family homes and that condos would float. Now I’m not so sure about floating. There are a lot of newly minted 3-4 millionaires with white hair looking to snag themselves something comfy for their retirement under 1Million and to divvy up the rest with the hopes their kids can stay in Vancouver. It’s f’ing sad what’s happening to this city. I hope you’re right and it all falls to pieces one day. I would be happy to see it return to the 70s. But for that to happen the Asian population has to fall below 8%, as it was in the 70s because they love real estate. What’s the chance of that?

    You: … your last paragraph…

    Me: It can’t go on forever for nice parents like yours… they just have to downsize, rent or get a smaller place, share their gains with their kids or move out of the city. What old fart will want to stay around here anyway when there are far better Canadian cities to live in like Toronto, Edmonton, Sault St.-Marie and Chibougamau?

    • Gary says:

      Okay you can argue that London Paris New York is equal or close to becoming equal to Vancouver because that is purely subjective.

      However if you consider that HAM is the epicly larger factor in Vancouvers case and none of that money goes into local economy or taxed to support services. There in lies the difference where world class cities are not buoyed by HAM and HAM alone.

      Try and fill in this sentence Vancouver is ____ capital of the world/continent/country. Anything other than “real estate speculator” doesn’t fit. That’s why it’s going to be a spectacular fail when prices just stop increasing…That’s how bubbles work. They just increase for the sake of increasing, hope for the sake of hoping…Until it all comes to a crashing end. Even the HAM won’t be able to save it since declaring losses won’t be a huge problem as long as they get out and move the money else where. When will it end? Probably when they see the rest of the city going down the shitter and derelict conditions grow closer and closer to their location.

      Let me be clear on this. HAM won’t be moving out until the locals start having trouble with the high prices within the lower end communities. The discounts will affect HAM property eventually. It’s just how markets work.

  11. mac says:

    The word “the” fits nicely. Not to mark me down as someone who agrees with that sentiment, though. You sound young. No offence.

    • “You sound young. No offence”

      I’d love to hear you explain why this is a relevant statement in the context of this discussion. You’ve said the same thing to me before. Frankly it strikes me as an underhanded ad hominem attack. What exactly is meant by this statement?

  12. wjk says:

    Kids should also think twice before accepting these gifts. I once married a 26 year old woman who ”owned” a house subsidised by her parents. They didn’t want her to marry me to begin with and used the house as a wedge between us when she did – by threatening to take it away. Our marriage fell apart pretty quick after that. The house was not the only reason but was definately a big contributing factor.

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