A report released by Legal & General and Cebr explores the role that parents play in helping their children take steps on to, and up, the property ladder. The report illustrates how the Bank of Mum and Dad (BoMaD) will provide more than £5 billion this year to help with 300,000 deposits for homes worth almost £80 billion.
This makes the BoMaD comparable to the top 10 mortgage lenders in the UK and it will be party to a quarter of all property transactions in 2016.
The report concludes that:-
The Bank of Mum and Dad’s average financial contribution is £17,500 which is equivalent to 7% of the average purchase price;
Over three quarters of “BoMaD” purchases – 256,400 of them – will be assisted by the buyer’s parents
22,500 and 27,000 will be supported by grandparents and other family members/friends respectively;
57% of Bank of Mum and Dad deposit contributions are gifts, 18% are loans with no interest and 5% are loans with interest
The reason why this is a problem is that it’s partly causing the rise in property prices in the first place – allowing them to continue to rise above the rate of wage inflation. This means that those who don’t have the luck to have access to Bank of Mum and Dad can’t get on the ladder.
Many people blame buy to let for raising prices, but this is far more of a contributor in my view.
Prices have been able to rise at a higher level than wages since 2000 because mortgages moved away from lending based on wage multiples to affordability and because the cost of servicing a mortgage fell from double digits in the 1980s/90s to around 3-4% - a fall to a third of what they used to be.
But prices couldn’t have risen at the level they have without Bank of Mum and Dad, purely because deposits could never have risen to the 17% they are now (on average) for first time buyers. They don’t need to put this level of money down, they only need 5%. So bizarrely as ‘affordability’ has worsened, the level of deposits have increased dramatically. This has helped prices to continue rising, when without the ‘new lender’ it they would have slowed.
Nigel Wilson, CEO of Legal & General, said: “The Bank of Mum and Dad plays an increasingly vital role in helping young people take their early steps on the housing ladder.
“But the generosity being displayed by UK families doesn’t make up for intergenerational unfairness – younger people today don’t have the advantages the baby-boomers had, including cheap housing that delivered windfall gains. People will always want to help family members – it is a natural thing to do. Relying so heavily on the Bank of Mum and Dad however risks increasing inequality as many young people today are not lucky enough to be able to access parental support when buying a home, or can’t afford to buy even with parental help.
“We have a supply-side problem in housing – we are simply not building enough houses. We need to build more, especially as the Bank of Mum and Dad could soon start to experience a funding crisis of its own.”
Is the BoMaD facing a funding crisis?
The report suggests that the BoMaD should not, as it stands, run in to a nationwide funding crisis for another 20 years. However, regions with the faster growing houses prices and those where prices are already the highest could have issues far earlier.
London BoMaD funding is already flirting with its breaking point, with parents contributing an average 6.2% of the total purchase price of properties to help their loved ones get on the ladder. This represents over 50% of the average BoMaD household net wealth in the Capital (not including property assets). In the South-East contributions will pass the 50% mark in 2025 and the same will happen in 2028 in the East of England.
The report notes that this issue is exacerbated for families who are from regions with lower household wealth but whose children need to buy in London:-“In 2016, those families that live outside of London, but whose children or grandchildren do live in the capital will dedicate an average of 64.1% of their household net wealth to helping them onto or up the property ladder.”
But what does this actually mean?
Basically demand over the coming years will start to abate. We are hitting ‘affordability’ buffers in some expensive areas, BoM&D will start to run out; the limit on lending to consumers at 4.5 times their salaries is already kicking in and property price growth outstripping wages as it has for some years now appears to be biting too. Add to this the increased taxation which is likely to reduce demand from buy to let, albeit this is likely to be the smallest influence, and the trend is likely to be lower demand for the future.
The problem is though, properties will still go to the ‘highest bidder’ because the underlying problem – as L&G point out – is a lack of housing supply versus the growth in population, until this is sorted, prices will continue to rise and it’s only the government and local authority planners than can pull together the building community to create the huge number of homes we need to satisfy demand.
Nigel Wilson confirms the problem is a lack of supply, without fixing this, the problem remains:-
“If we are ever to end or reduce our reliance on the Bank of Mum and Dad (and Government initiatives such as Help to Buy 2) we need a new innovative approach to housing. Helping first-time buyers is necessary – but not the whole solution.”
“We need to modernise housebuilding and make it more efficient so that we can increase supply and quality for all forms of tenure, and all income and age groups, from students to pensioners. Institutions like Legal & General can regenerate not just residential housing, but the towns and cities in which the homes are built. Infrastructure, jobs and local economic growth are all key to creating thriving communities where people want to live.”