Wealth Transfer? No, Wealth Destruction – “Since it’s our retirement money that we are using, it is a stretch. But I just don’t see how they could afford to buy a place otherwise.”

Anecdote 1:
Thirtysomething condo owner Shara Bruce says that despite her relatively high-paying job, she still couldn’t afford to buy the condo she owns in the Woodward’s building.
That’s why Ms. Bruce’s mother made the down payment.
“There’s no way I could save that kind of money for a down payment living in Vancouver,” she explains. “And I don’t make a small amount of money. I make a fairly good salary as a construction contractor.
“I can totally pay her back, or it can be part of my inheritance.”
Her mother, Ruby Bruce, says she also paid her other daughter’s down payment on a Vancouver condo.
“It’s tough for them to get the money together,” said the elder Ms. Bruce. “The other daughter paid me back when her place sold.”
Ms. Bruce’s mother is part of a demographic that has done better than most in terms of real estate. … Ruby Bruce bought her Vancouver home more than 36 years ago for $54,900, and today it is worth $750,000
[Return of 7.5% p.a. nominal; 3.5% p.a. real]. Because parents have clear title to their homes, they can borrow against that equity or use their retirement savings to help their kids.

Anecdote 2:
Victoria-based homeowner Gail Argatoff says she and her husband recently bought a condo in Kitsilano for their daughter and son-in-law.
“We got them a condo and they are going to work on paying us back when she finishes law school,” Ms. Argatoff said. “Instead of them paying rent, they are gradually paying us. … We have another daughter and we’d like to do the same for her one day because she’s single.
“Since it’s our retirement money that we are using, it is a stretch. But I just don’t see how they could afford to buy a place. I don’t see how affordable the city will be for the future generation.”

Anecdote 3:
Robert MacKay, senior marketing and communications manager for PricewaterhouseCoopers, says he plans to buy a two-bedroom condo in North Vancouver for his three children.
“It’s using the equity out of the family home to buy the condo and they can pay rent to cover the mortgage, and then they have something. It’s just a matter of letting them stay in town so they can go to university and whatnot.”
Mr. MacKay says he and his wife will also be the recipients of an equity transfer in the form of inheritance.
“We don’t like to think about it that way, but [our parents] are not going to be on their own for very much longer.” …
Mr. MacKay believes that most young people won’t have land-rich parents.
“There are still a lot of people my age who don’t own a huge chunk of real estate.
“I think [unaffordability] is a very significant issue,” Mr. MacKay said. “So be nice to your parents,” he added, laughing.

“Vancouver is extremely expensive, so most young people buying are doing so with assistance from their parents,” Ross McCredie, president of Sotheby’s International Realty Canada, said. “A lot of companies, like ours, are advising baby boomers to set up a succession plan, and part of that includes saying to your kids, ‘We don’t want to waste our inheritance, so you buy real estate with it.’
“We see it in a significant way with Mainland Chinese families who may have immigrated here and bought assets here. They are buying real estate for their children.”

“I believe that the baby boomer is now so risk averse that they are taking their money off the table and consolidating, and the first-time buyer is a benefactor of this aging demographic,” Bob Rennie told a sold-out audience at the Urban Development Institute’s annual general meeting last week.
Mr. Rennie forecasts that the wealthy demographic will continue to transfer its equity to the younger generation, and “buy down” while maintaining their lifestyle.
“I believe that this room’s [RE professionals] success will be to understand what this risk averse, buy-down baby boomer will buy next,” he told the audience of developers, marketers and industry players.

– excerpts from ‘Land-rich boomers buying nests for their young’, Kerry Gold, Globe and Mail, 1 Jun 2012 [Hat-tip evilfred]

From the comments section of the same article [Hat-tip Joe_BABHHC]:

“As a boomer who owns a home with free title I personally would rather have it priced realistically so my kids could live in the neighbourhood instead of the basement. While it is of course nice for parents to help their children this does nothing but contribute to the problem of excessive market values. If the new generation of buyers lived by the same rules as their parents , saving and waiting, the market would adjust downward and we would all be better off.” – dbh 2 Jun 2012 10:59am [If we issued awards for ‘getting it’, dbh would get one. -ed.]

“The boomer parents need to consider the risk they are setting their children and themselves up for.
As a home owner, you need to be able to absorb unexpected expenses (special assessments, leaky roofs, etc). If the children cannot save up a 5% downpayment, how will they deal with the unexpected?
And what happens when prices fall? The children now owe more than the property is worth. And the parents may no longer have enough equity in their house for a comfortable retirement.”
– MM_van 2 Jun 2012 11:34am [Another award here, please. -ed.]

“Twenty something years ago when interests rates were north of 17% and we bought our first house, we were over the moon when our folks bought us and washer and dryer. Boy, have things changed.” – BikeQueen 2 Jun 2012 12:32pm

“That’s why my wife and I just bought two condos as rentals so when our 6 year old twins grow up the can have their own places or sell then for down payments.” – AHappyGuy
“Can’t tell if this is sarcasm . . . I call a top.” – wezvv
“What is a top? This isn’t sarcasm. It’s what we’ve done.” – AHappy Guy
– exchange 3 Jun 2012 12:40pm onwards
[‘A top’ is a child’s toy. -ed.]

Households who have overextended and overleveraged themselves in RE are very vulnerable at this point in the RE cycle.
This includes, if you like, the ‘multigenerational household’… elderly parents, young (almost boomer) children, adolescent grandchildren (and variations on this theme). Over the last 10 years, some of these ‘extended’ Vancouver families have overextended themselves into RE and, on paper, appear to have done very well. It is very hard for people to see that this state of affairs won’t continue. Even at this late stage of the cycle others are still emulating them.
As commenters quoted above imply, there is a high risk of wealth that would have been transferred rather ending up destroyed. Worse, some children may see inherited assets turn into liabilities. For instance, instead of one fully paid for home, a family may end up with two or three or four underwater properties.
– vreaa

Last word from Ralph Cramdown [also from the G&M comment section, 2 Jun 2012 3:18pm; here with editorial poetic license]:

“Dear Auntie G&M,
I’m nearing retirement, and have most of my net worth concentrated in a single asset which is very pricey right now. Although completely undiversified, I’m bored. Maybe it’s the lack of leverage? Any advice?
Basil Lacklever”

“Dear Mr. Lilyliver
Lever up! Don’t diversify into another market or a different asset class, buy another property in the same market.
Auntie Alluneedisahree”

14 responses to “Wealth Transfer? No, Wealth Destruction – “Since it’s our retirement money that we are using, it is a stretch. But I just don’t see how they could afford to buy a place otherwise.”

  1. So what happens if you die underwater anyways?

  2. Renters Revenge

    This inter-generational debt servitude and gross malinvestment will not end until we regain sovereign control of our money supply.

    “Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of sovereignty of Parliament and of democracy is idle and futile… Once a nation parts with control of its credit, it matters not who makes the nation’s laws… Usury once in control will wreck any nation.”
    William Lyon Mackenzie King

  3. “There is not in the press any reading so improving as the ‘obits’ … I doubt very much indeed whether any one could read obituaries every day for a year and remain a bad man or woman.”
    Robert Cortes Holliday
    (RIP Bob Chapman and Ray Bradbury)

  4. Ralph brings it.

    A bad investment is a bad investment, though there are hints of what’s going on here: finding ways to transfer wealth between generations in a tax-efficient manner. Ironic perhaps they are being taxed anyways.

  5. I love how all the parents are getting places for their kids so they can stay in the city. If only there was some other way where a person could just borrow a place to live for a nominal fee without actually buying it….

  6. Sounds like the issue here is not if prices will drop/collapse…seems like if (most?) of the current houses bought were financially backed by inheritance (laundered, free money…etc) will there be a lot of suffering USA style or not? Hmmmm….

  7. “I can totally pay her back, or it can be part of my inheritance.”

    Hmm, I wonder which one she is hoping for….

  8. Could we see parents having to leave Vancouver after helping their children stay here? What noble sacrifice!

  9. “I believe that this room’s [RE professionals] success will be to understand what this risk averse, buy-down baby boomer will buy next”

    The way boomers are going, I might suggest investing in a high quality Dog Food manufacturer.

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