To give or to guide? How parents can best help adult kids into housing market

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High-net-worth families need to have early conversations about how their young adult children will get into the housing market.

Before contacting a real estate agent or looking at properties, parents should call a family meeting first, says Tom McCullough, a Toronto wealth advisor and co-editor of Wealth of Wisdom: The Top 50 Questions Wealthy Families Ask.

“These are difficult conversations, but they are instructive for families to have,” says McCullough, chairman and CEO of Northwood Family Office.

The talk, or an ongoing series of talks, could centre on how the family plans to go about transferring wealth to the rising generation, he says. This would not only involve the family’s material circumstances, but would also identify its most important values. If family guidelines surrounding the financing of real estate and homeownership are set up clearly beforehand, and are known by all, it can help to avoid resentments later on, he adds.

Of course, parents of great means naturally want to do good things for their children. Getting them on the property ladder probably tops the list in Canada, as it carries with it the long-term potential of profiting from future home price appreciation.

But is an outright gift of a house at a young age a good idea?

The average gift in Toronto during the first three quarters of 2021 was more than $130,000 for first-time buyers; in Vancouver, it averaged $180,000.

With 35 years in the wealth management and family office fields, McCullough suggests this might be a too-easy solution. Instead, he recommends that parents make the investment of time in their children, to help them build character and to develop the financial muscles needed to successfully navigate life.

“If you give your child a house at age 25, they never will have to make choices about whether they should pay down their mortgage or go on a trip,” he says.

Try matching the offspring’s funds

By taking the time to train younger family members, parents can give their children the gift of skills. “That’s the job of parents – to provide security, plus the opportunity for growth.”

Children of affluence should learn to face natural consequences and be exposed to the routines of others who have less, McCullough says. In Wealth of Wisdom, which features interviews with more than 50 top global experts on family wealth, one contributor says that kids of wealthy families should be given the experience of life in the bleachers, and not just in a private box.

In a similar vein, McCullough says that matching is a great principle – instead of buying a child a car, for example, a parent could offer to match the sum saved by the child.

Homeownership, too, can be made a part of the process. Perhaps a wealthy family should not fund the whole thing. To begin with, an interest-free family loan, instead of an outright gift of a house, can make a lot of sense, he says.

In a report released in October, CIBC Economics illustrates the growing trend of parental gifts in the Canadian housing market. Parents gave more than $10-billion in down-payment cash to help first-time buyers over the past year, accounting for 10 per cent of total down payments in the market as a whole.

How to handle a gift

About 30 per cent of first-time home buyers received help from family members, up from about 20 per cent in 2015, writes economist Benjamin Tal.

The gifts in 2021 averaged $82,000 for first-time buyers, up from about $52,000 in 2015.

Parental gifts are having an even bigger impact on the housing markets in Toronto and Vancouver, where prices have surged for more than a decade, the report says.

CIBC numbers show the average gift in Toronto during the first three quarters of 2021 was more than $130,000 for first-time buyers; in Vancouver, it averaged $180,000.

About 9 per cent of move-up buyers – those moving from a starter home to something larger – received parental help, too, with the average amount jumping to $128,000 in 2021 from close to $70,000 in 2015.

McCullough suggests that before parents give gifts to their offspring for housing, they should work with a wealth advisor to solidify their own objectives and learn how other high-net-worth families have handled gifts in the past.

“That’s my role. [I ask them,] Have you thought about this?” McCullough says.

Consider an interest-free loan

He urges clients to think of the family as having a balance sheet. Start with the resources or assets, then consider the liabilities, such as lifestyle or legacy spending. They might have philanthropic goals – maybe mom wants to fund a wing in a hospital, for example. What can they afford to give via philanthropy, in addition to taking care of their children? Essentially, an advisor will do the math so that a family does not over-commit.

Next, an advisor will help the family look at asset allocation and portfolio construction. Where will the money be put, or invested, until it’s needed in five, 10 years or longer?

An advisor can also help families make contingency plans. When it comes to gifting money for housing, parents should consider the possibility of marital breakdown. Once a house becomes a matrimonial home, by law it is owned equally by the child and his or her spouse. If that marriage breaks down, an ex-spouse is entitled to half of the property.

One way wealthy families can navigate this potential problem is to give a child an interest-free loan toward housing, especially during the early years of a marriage. If the marriage or common-law relationship ends and the house is sold, the loan would be paid back to the family. Conversely, if the relationship lasts, the loan can be forgiven at any point.

In general, McCullough says, high-net-worth families should avoid the temptation to use money and power to solve problems too quickly. Children in high-net-worth families should earn their way into adulthood, he says, and homeownership can be part of that process.