A cautionary tale about tough love

Here’s a tip. If you want to clear the room of young people, start a conversation with: “Back when I was your age.”

Unless, of course, the subject is real estate.

Every generation is fascinated with the prospect of buying a neat 4x2 for a bargain, sitting on the asset for a few years, then using it as the launch pad for a life of wealth and happiness.

For those just entering the housing market, you might have thought that the past 10 years would have put an end to that, with median house prices rising from $290,000 to $549,000, a return of 6.59 per cent per annum.

Rather than suggest that at these levels buying your first home should become a fundamental question about affordability, the real estate and finance industry responds by dragging mum and dad into the discussion.

It’s all about how we help our kids, you see.

The industry, keen to collect a few more commission dollars along the way, will gladly see mum and dad stump up the deposit.

Or better still, guarantee the loan.

There’s no question that where the family’s done well through life, helping our young ones get a start in life is admirable.

There’s a solid argument about tough love being good love, instilling caution and thrift on our young ones.

But for all of that, if you can afford to help the kids, then good luck to you.

The issue is for parents with modest savings who may not be aware of the consequences if things should go bad and were pressured into assisting. A colleague recounts a tale of a few years ago:

“Mum and Dad, retirees living in suburban Perth, receive a call from their son in Melbourne.

“The excited youngster tells them he has found the dream coffee shop that he wants to buy.

“While he has a home in Melbourne, the mortgage on that, plus the amount he wants to borrow, means that he needs a guarantor on the loan.

“The loan of $100,000 provides the shortfall and some working capital.”

The circumstances are irrelevant in this tale but let’s just say, three years later, the business has failed.

By the time the son’s place is sold, the creditors have moved in and bankruptcy looms, the significance of the guarantee documentation signed three years prior reveals the horrendous end-game.

On the basis of the guarantee, Mum and Dad will need to fund $100,000 of the shortfall.

This resulted in Mum and Dad withdrawing half of their life savings.

At the time, interest rates were around 6 per cent — not only did they lose the $6000 of income but it triggered the gifting rules at Centrelink.

It’s not always about the money, but sage advice you can pass on.

The stuff that one day, they’ll be able to say to their kids: “When I was your age . . .”