More FHBs relying on the ‘bank of mum and dad’

By Martin North, cross-posted from the Digital Finance Analytics Blog:

We have updated our analysis of assistance first time buyers are getting from their families in a desperate effort to get into the housing market at a time when the entry barriers in terms of price and affordability are as high as ever they have been. In addition, high loan-to-value loans are less available, so first time buyers need a larger deposit, and first owner grants are harder to access. Savings interest rates are also very low.

We released analysis a few months back, which caused quite a stir as it highlighted the inter-generational  issues in play. We have now updated the quarterly analysis with data to December 2016.

First, more first time buyers are getting help from parents – up to 54% in the past quarter. This help varies from a loan for a deposit, a cash present, help with transaction expenses, or ongoing assistance with mortgage repayments or other household expenses.   Parental guarantees are falling out of favour.

Parents are able to assist, thanks to the wealth effect created by home price appreciation, which is still occurring in the eastern states, though more patchily elsewhere.

Just under half the assistance is going towards first time buyers in NSW (mainly Greater Sydney), where the affordability issues are most difficult, and home prices the highest. But other states are also, to some extent, also in the game.  Ignoring the volume growth, the percentage mix has been relatively stable.

But here is the volume picture, which shows the relative number across states (note the small counts in some states are less statistically robust), but the trends are clear.

Another cut on the data is looking at the type of property being purchased. In 2015, more investment property was is the mix, but now the growth is among owner occupied purchasers.

In terms of the value of the financial contribution, it varies. But for those making a loan or payment direct to assist in a purchase by way of a deposit, the average amount is now north of $85,000.

If parents bring forward payments to assist their offspring, it is worth asking whether this act of kindness may have unintended consequences.

  • First, are parents giving away some of their future financial security?
  • If it is a loan, is the basis of repayment clear, and documented?
  • When a bank assesses a mortgage application do they consider the source of the deposit – receiving a “seagull” lump sum is not the same as demonstrating a history of saving, and the risk profiles down the track are different.

It also raises complex questions around equity between siblings, and a whole raft of questions relating to inter-generational finance.

It is also worth remembering that more first time buyers are going to the investment sector before purchasing their own home for owner occupation, as our first time buyer tracker shows.

Unconventional Economist
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Comments

  1. I guess as millenials become old enough to have adult children, this trend will peak, and the decline in home ownership rates will accelerate accordingly (i.e. because millenials without the means to by themselves homes aren’t going to be able to help their children buy homes), assuming the absence of a big improvement in housing affordability.

  2. There has to be some kind of obligation for parents to assist their children to enter the property market. Assuming those parents have close family ties with those children and want to stay close for the benefits of having easy access to their grand children.

    Gen Y’s parents presided over the current policies which have lead to our property market being in its current state. Whether the outcome was intended (median Sydney home $1m+) is irrelevant.

    You can’t ask for the children to pay tax to go to the aged pension while the home is not included in the asset test. If the home is included in the assets test then income taxes go down and the obligation to help their children into the property market.

    • Grandchildren! You reckon that having not had the financial resources to buy a home they can afford….children?! A nice fluffy cat, maybe, but the financial strain of +18 years of family responsibilities? (NB: Oh, and that’s assuming they stick it out and don’t have M&Ds’ kind gesture diluted or have to be returned)

      • I can’t afford a home but I have two kids.
        I reckon that within a generation it will be more common for parents of young children to rent than to own, again, assuming nothing changes to massively increase home affordability. At the same time, the lack of home affordability, does stand a good chance of being a mild deterrent to starting a family, and leading to a slightly lowered TFR.

      • I think what Angry means is if you have a beautiful child about to turn two, and your health you are wealthy beyond measure, no matter what your bank account says.

    • Many parents of genY could aford with 2 wages to buy a home in the old days, the majority bought nothing special (you will be amazed to know) They could only just afford to buy then so how on earth are they able to buy for their kids at todays prices. The ‘All boomers are rich and had it on a plate’ is a fairy tail on par with the happy family in an American sitcom where daddy is an architect and mummy stays home and everyone is happy. Reality for 90% of us is completely different.
      No what we really really need is far lower house prices so that younger people can get in with favourable conditions, not an never ending family obligation which works both ways and for generation after generation as it does in some of the more primitive European societies.

      • All those boomers (And others) sitting on paper capital gain are going to be
        a) ecstatic that house prices fall to let their offspring buy (and no specufestors or foreign nationals, natch),
        or
        b) screaming for pollies’ heads on pikes for not doing sumfink to protect teh housing.

        I bet on b.

      • You will be surprised what many of us think and answer a) is popular among my cohorts and tribe, with one notable exception who is a GenX Joe Hockey lookalike pig up to his neck in RE speculation.

      • My mum owns several properties, bought without negative gearing. She wants prices to drop so I can afford to buy and start a family. At current prices I don’t want to buy and starting a family seems scary given the current state of affairs in this country.

    • Just sell the Australian house for however many million and everyone can go live in Malaysia (including rent) for $50,000 p.a. Problem solved.

  3. This has become a real factor in the market.

    We have been dumbfounded by friends who have a salary half or a third of ours (!), but have a very nice house worth $100-200k more than we can afford (even with our superior salaries). We have since learnt that they are benefitting from significant help from mum and dad. Remember 85k is average, so for every party that receives 20k, there’s another receiving $150k. A huge lump sum! And it is a gift, that can be used as part of a deposit.

    This is dividing the market into a few categories:
    a) those who have owned a house previously and thus have the benefits of the capital gains of history
    b) those who have significant help from mum and dad
    c) those in neither a) or b)

    What is happening is that Australia is being divided by a new class – those families that own good property, and those that don’t. No longer does occupation, education or income matter. What matters is whether you or your parents own good property and have benefited from the boom. If they do, you will get help, and effectively that property will be passed onto you. If you don’t, you will never be able to compete with those who fall into category a) or b) and are effectively locked out.

    It is a sad state of affairs, and has caused us to despair and give up.

    • Yes, a far more primitive society where inheritance and nepotism runs the entire country. Think old Europe, South America or the Philipines.
      The idea of a meritocracy seems to have gotten very muddled and in fact is now working in reverse, ie you have wealth (by any means) and you get the kudos of merit which applies to jobs as much as it does to housing.

    • The other group is people whose parents can provide child care, enabling them to earn two incomes without losing most of the second one to child care providers.
      A friend came over the other day, and was complaining about her mother’s suffocating intrusion into her life, before winding up by saying there as nothing to be done as without her mother looking after her kids most of the time, she wouldn’t be able to afford or find child care to work, and by extension, wouldn’t be able to afford her mortgage.

      • @Robert – great point made there, ie. there is more than one way to lend help to afford a home. There is financial help and there is help that can be monetised eg. free child care. On a side note I wonder if that “free” care provided is assessable as a tax benefit?

      • Yes, a good point that there are other factors at play. Another is allowing kids to move back into the family home free of charge to save on rent for a number of years.

        I think that those acts that help build the deposit (such as free rent or large lump sum gifts) are more significant than those acts which allow higher repayments though. I think more often it is fronting up the deposit that is the biggest burden, not necessarily the cost of repayments.

      • So… I wonder how many grandparents want to give up their retirement to be defacto daycare?

        Some, sure, but the amount needed?

      • @superunknown,

        lol
        Notwithstanding the number of contemporaries I know who use the ‘Mum and Dad Early Childhood Education Centre’, sometimes while receiving finance from BoMaD, I thought boomers were all supposed to be working until death, anwyay?
        Indeed, the reason my wife and I can’t benefit from this scheme is because my parents at 66 and 70, who almost live close enough. are still in full time work (other circumstances put her parents out of the picture),

    • ‘What is happening is that Australia is being divided by a new class – those families that own good property, and those that don’t.’

      This is basically it. My CEO can barely afford repayments on a modest sized home within the 10km CBD line. In contrast the plebs with property loaded parents don’t even bat an eyelid at a $1m block of land and that $400k reno.

      • Sorry, that doesn’t actually mean anything

        Mortgage?
        How many TVs in house
        Cars on lease?
        Etc etc

      • In addition to SU’s question, CEO of what – something like a milk bar, or something closer to a multinational banking group?

      • Lets say you’re an exec coming to Melbourne with a 20% deposit + transaction costs in your pocket. You want a nice family house in a good burb. Lets try Glen Iris, a nice burb but not flashy – such a house will be 2.5M (conservative). Awesome, you’ve got 500k deposit + costs. Whats that you say? I need to earn more than 500k pa to afford the mortgage (12k a month!).

        What a joke this place is.

  4. Steve 99 thanks to the real estate boom, the value of working and earning income has reduced significantly relative to owning land. Its a type of feudal society we are creating here where owning land is the entry point to the aristocracy and working is for peasants

    • Thanks Kodiak!
      That made me laugh.
      I was thinking that this acceleration of ‘support’ to ‘firsties’ was some conspiracy amongst lenders and the attendant symbiotic ‘percenters’ attached to increase loan sizes while obtaining required the security to make the loans stand up by any means.

      Then, it occurred to me that it’s been a long time since I’ve heard any negative comment about any property purchase. Every single one is either, savvy, smart, intelligent, forward-looking, getting in on the G floor, setting ourselves up, smashing down tax, riding the wave and (best of all) a win /win and these all cause me to shudder.

      Glad to know there’s at least some other ‘black’ hats who find the increasing army of smiling, laughing, devoid of any caution ‘yellow’ hats now totally insufferable. Note: might be my Mick heritage and experience, but ‘when life looks like easy street, there is danger at the door.”

      • Is that an Irish folk song? I thought it was Jerry Garcia. Australia is a bloated elephant standing on a few cramping toes in the last bit of the corner that hasn’t yet been painted.

    • Spot on. Its a fucking joke. But not funny. The political process is just so broken and corrupt. I wish, wish, wish it would just pop.

  5. http://www.watoday.com.au/comment/there-is-no-political-will-to-tackle-housing-crisis-in-western-australia-20170209-gu983y.html

    The latest Productivity Commission report is sobering. It shows that not only is Western Australia now the worst performing economy in the country, it seems we are on track to become the worst performing state in the provision of social housing and stemming homelessness.

    I dont understand. How is it these peoples parents dont buy them a house to live in. Didn’t Turdbull say that is what their parents should do. Maybe these people should have chosen richer parents. Its their own fault.

    • Jumping jack flash

      Indeed AngryMan, no housing affordability problem at all. Decreed by our majestic PM himself that you should simply get your rich parents to help you buy a house, if you can’t manage it yourself.

  6. The bubble will pop when:

    A) Work from home happens. Thus people can live 100 km away from the CBD.

    B) Robots kill 40% of jobs. Thus you can live more than 100km from an international airport.

    • For Melb Sydney, nothing matters other than the loss of interest of the city by Chinese either via straight ban or some kind of external crisis. I don’t really think even unemployment is going to matter too much in the short run as the new wave of Chinese ‘immigrants’ don’t really rely on local economy to generate income.

      Also all of them are keeping their Chinese passports thank you very much. Amongst the well off, very few actually wants to turn full Australian. As far as the Chinese are concerned, Australia is just one giant retirement home/resort town.


    • to Chinese people Australia is one giant retirement home

      I guess as long as the number of Chinese people turning 60 continues to grow and never declines, there’s no prospect of house prices falling.

    • It’s going to happen way before that. You might have said that the feckin kangaroos will save the place.

  7. Well MB don’t understand China very much, or at all really which is why this new explosion wasn’t predicted. I wouldn’t fault them entirely but right now, Chinese money is driving bubbles everywhere. Something HnH still hasn’t really caught on yet.

    As for RE, bank of mum and dad also applies to Chinese families except the demographics is on another level. Only children born in the 80s are now forming families. Everyone is an only child which means the typical Aussie is fighting concentrated resource of 3 families for a family home. Basically no chance even with bank of Mum and Dad, all you can afford is these horrendously planned new suburbs full of dog boxes and fake lawns while Chinese lap up the existing leafy suburbs.

  8. Yep, I think I agree with this. To be fair, they acknowledged they got the iron ore prices last year dead wrong, but the other glaring miss has to be on house prices. Also I don’t think I’ve seen much of that “Don’t Buy now” guy for quite a while – turns out we would all have been better off ignoring his advice.

    Kind of screwy, though – me and a mate were talking about how actually our best course of action would have been not to bother with years of university and getting a grad job. We should have just taken a minimum wage job right out of high school, loaded up on property debt and we’d probably be able to retire by now.

    • From 2010 to date you probably would have been better off, but will that continue?

      Unless you fully understand the range of outcomes, you can hardly make a call that loading up on debt is the best solution. With an asset class as illiquid as RE, sh1t hits the fan fairly quickly if credit/demand dry up

    • We should have just taken a minimum wage job right out of high school, loaded up on property debt and we’d probably be able to retire by now.

      Yep, and that is one of the most insidious aspects of this whole horrible bubble in my opinion. A whole generation is learning that it is more effective to speculate and grow unearned capital gains than it is to work hard and innovate.
      It’s a terrible message to be sending to our young citizens.

      I really despair right now. A major reset is required to change our culture.

  9. You can hardly blame someone else for your decisions. They put up a thesis, you agreed with it, it didn’t work out.

    I don’t know how it’ll play out, but I can see overvaluation. I can buy the unit I’m living in right now out-right (no mortgage), but I’m choosing not to because of this overvaluation. The way I see it, I’m paying <3% gross of total asset value (before stamp duty, inner-east of Melbourne) for a place that's maintained for me; meanwhile I can put my assets wherever else I like.

    I would suggest not cursing because you feel like you've missed the boat, but see how you can take advantage of the situation. What else could you do with that 'housing deposit' you've been saving up? (I don't mean go and blow it, but perhaps spreading it across various asset classes may be better).

    • Believe me, when your kids is going to a good school nearby, you won’t want to live with a 120 day eviction knife over your head all the time. Rent != Buy, not with our current screwed up laws. You might not care about getting booted but you won’t want to put that burden on your children.

    • “You might not care about getting booted but you won’t want to put that burden on your children.”
      I wouldn’t have them change schools (assuming that’s what you’re referring to) – my partner would just drive them in. Sure, it’s an extra 20minutes or so on their side, but it’s a small price to pay when you see the premium to own the house.

      And in any case, there’s steps to mitigate being moved out (can’t eliminate it entirely though).
      Firstly, whether I pay $600 or $700 per week for a 3-4BR house, I don’t really care. I’m looking to pay a fair price, as per the next point.
      Secondly, the chances are that if I’m good to the landlord and paying a fair price, they’ll keep me there unless they want to move in or develop it. Given I’ll likely move into a townhouse or something somewhat newer, there won’t be room for development (or there’s no appetite for it), leaving the only option as them moving in.
      In my current place, as a gesture of goodwill to the landlord, I had some work done on my dollar (~$350 worth) in the first 6 months of moving in (with approval of course). Since then, they’ve been throwing 12month leases at me without question, not to mention actioning every maintenance request I’ve submitted. Best $350 I ever spent.

      There are ways to get around the general concerns people have about renting (for the most part) – even if our tenancy laws do stink.
      And in any case, if the landlord wants to be a pr1ck, I’d rather move anyway.

  10. arthritic kneeMEMBER

    Just got my boys into school and made the mistake of doing the sums. My little family of 3 children contributed just shy of $250k to the childcare business in the last 8 years. That’s a fairly big deposit and mentally tough on my wife. Try working without pay for nearly a decade. My parents bought a house on one public servants wage. You can’t get a parking space for that in Sydney today. Over 50% of FHB requiring parental assistance is the simplest response to Boomers who say it was just as tough in their time. Pretty sure it was unheard of then

    • That’s one of the big things missed with regard to such exorbitant house prices – the social ills. There are many mothers and fathers out there who would much rather be at home raising children, but they just can’t afford to because the cost of shelter means both parents need to work.

      Melb and Syd, i have no idea what is up there. The price action beggars belief. I’d feel much more comfortable buying here in Perth. Prices have done jack sh*t here since 2007. Median has gone from something like $475k back then to $520k now. Not much growth in 10 years. Sure it will probably stay stagnate of get worse, but if Syd and Meb pop it’s going to be carnage.

  11. I have a real problem with taxpayer funded First Home Owner grants going to first time investors, rather than first time owner occupiers. It encourages a society of investors instead of home owners. Landlords over renters. It’s just wrong and all state governments should change the qualifying criteria for their first time housing “grants” to only apply to genuine first time owner occupiers, not first time investors.
    Another thing that needs reform is the rule that classifies property as being your PPR (principal place of residence) as long as you live in it for 12 months out of every 72. WTF? I know of a number of boomers who coughed up the deposit for their kids first property, kid pockets the first home owners grant, lives in it (with a few mates) for 12 months…then moves back home to mum and dad. Property becomes a rental and can be sold at any time up to 6 years after purchase…. without ANY capital gains tax liability. I’ve seen this happen more than once.
    What an absolute joke.

  12. Were prices at fair value then (3-4x household income), or just less shit than now? Australia has actively denied an entire generation+ the opportunity to pay fair value for a home their entire adult life. I look forward to witnessing the appropriate consequences of these decisions / actions one day… I hope! Fk everyone, no exceptions, who borrowed to pay above fair value for they are the cause of obscene prices (no buyer, no transaction).

  13. Popped my head in to an auction a few streets away at the weekend. A “three” bed (read: two bed plus study) apartment with no parking (and barely any chance of street parking) sold for $1.544 million; just a lazy 14.5 per cent above guide price.

    The bidding came down to a woman in her late forties (who was constantly working out sums of rental return on the back of her bidding card every time the price went up) and a guy in his early sixties. The guy in his sixties won the auction at which point his 20 year old daughter jumped up and down and screamed “thank you, thank you…” and gave him a big hug.

    The point is; how are FHB or even OO looking to trade up supposed to compete with professional investors and the BoM&D?

    Housing is a basic human right. However, in Australia it has become an asset class to be traded to the highest bidder to the detriment of tenants and young families alike.

  14. I don’t think it has occurred to the Bank of Mum & Dad that their collective behavior is inflationary. They only see it individually as giving their progeny a leg-up. In reality, it is a bonfire of unnecessary debt creation locking in the kids to usurious levels of debt peonage.

    I do wonder how many BoM&D can truly afford to hand their kids a cash gift or meet ongoing repayments given that a large part of the “equity” in their own homes is predicated on the behavior of other BoM&D gifting deposits to their kids.