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May 3, 2016 | Parenting

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.



Forget the Chinese dudes. It’s the Bank of Mom that’s the prime driver the residential real estate market in Canada. This pathetic blog has given you the survey stats to prove it – and the consensus seems to be about half of first-time buyers are subsidized by parentals. Astonishingly, more than 40% of move-up buyers also leech off their folks.

But should parents be forking over their retirement dough so kids without money can own real estate?

Some financial advisors think so.

One vacuous TV network that will remain nameless (CTV) asked two of them the other day how parents can best help Millennials get digs they don’t deserve, but want. The suggestions were stunning. Like this: “When parents want to build up savings for their kids, they should begin with maximizing TFSA contributions. ‘You don’t pay any taxes at all on the growth, and you are in control of the money,” she (the advisor) said. “The account is in your name, and you could give (your kids) as much as you want.’”

Or this: “Parents who’ve suddenly found themselves sitting on plenty of equity on their homes are often tapping into that equity to invest in an income property, with the intention of eventually handing the property over to their children. In these cases, she recommends investing in a low-maintenance property, such as a condo or a townhouse.”

And my fav: “Delay downsizing so your kids move back home. Some parents are opting to stay in their larger homes with the intention of having their children live with them for longer than they may have once anticipated. Simmons said this can be a good way for children to save up for a future down payment on a property.”

Wow. Where to begin? Given the fact TFSAs can now contain serious money (almost a hundred grand for a couple), render taxless growth and provide a cash stream in retirement which does not count as income, push up your tax bracket or cause federal pogey payments to be clawed back, why would you give it to the kids? You like eating KD?

As for raiding equity in your paid-off house to buy a rental condo you intend on gifting to your spawn, better think that one through a bit more, Ms. Advisor. It’s virtually impossible to achieve positive cash flow on an urban rental these days (even Brad Lamb has stopped trying to convince anyone), so the only benefit would be a capital gain if prices continue to rise. But gifting a rental to your kid which has appreciated in value means capital gains taxes will be triggered upon transference of the deed. And guess who pays that?

Delaying downsizing your house so the kids can live there and mooch means equity cannot be liberated, can’t be invested and won’t start providing you a retirement cash flow. Given the fact most people seem to have most of their net worth buried in a single asset these days, that can be a serious crimp on the future.

So if you want to ensure your kids gain while you lose, you know where to go for advice. But the more important question is this: are you actually helping your offspring by launching them into real estate ownership when they don’t have the money to do it themselves? (Second question: did your parents do that for you?)

The legions of parents who do subsidize their kids through a Bank of Mom forgivable loan obviously believe they’re doing good. They think the child will start growing equity instead of ‘throwing away money on rent.’ (Throwing away money on interest, closing costs, condo fees and property tax is apparently better.) They argue this is a great time to take advantage of historically-low rates (which will reset higher when a mortgage renews). They believe the gift will help their kid become more financially mature (by taking free money). And, of course, when you have your own condo you can attract more chicks (not an official Mom reason).

Those gnarly financial advisors with stubble, cowboy boots, Harleys and no heart, point to a few counter-arguments. Like debt. A mortgage is not a car loan, since it’s typically amortized over 25 years, can cost a lot to get out of, and diminishes slowly. Why would you want your 23-year-old saddled? Worse, putting a kid into an owned property pretty much destroys her ability to be flexible and mobile, to move easily chasing a career or experiences. And how about marriage, or kids? Odds are the condo will have to be ditched, especially if it’s one of those new, spacious 550-square-foot deals.

Moreover, rents are somewhat controlled, while property taxes, condos fees, insurance and special assessments are not. And the big threat is a market correction – which absolutely will occur at some point. You could be crowbarring your little jewel into an asset that sends him underwater, crying for a bailout from the same people who got him into it.

Of course, if you want your offspring to feel emotionally indebted to you for decades to come, to be consumed with guilt if they don’t show you enough appreciation, to increase their reliance plus be physically and financially prevented from moving away and achieving their true independence, while you hobble your own future, go ahead.

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May 3rd, 2016

Posted In: The Greater Fool

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