Research published by Legal & General highlights the importance of the ‘Bank of Mum and Dad’ in a housing market with sky-high prices and insufficient supply; family contributions toward house purchases now amount to £5billion p.a.

 

On average parents contribute £17,500 to the deposit on houses purchased by their offspring, with the total value of properties purchased reaching £77billion.

If BOMAD were a mortgage lender it would rank in the top ten, helping 300,000 people onto the housing ladder this year.

In terms of its terms and conditions the ‘bank’ would undoubtedly top the customer satisfaction rankings; more than half of the money is gifted, and where it is lent, repayment periods are protracted and interest rarely applied.

Unfortunately, this additional supply of money is exacerbating the very problem it seeks to ameliorate; with a fixed supply of housing stock, family money is causing unnecessary house price inflation.

With double-digit house price inflation that far outstrips the zero real wage growth, many first-time buyers would be denied access to the market without parental assistance and a quarter of all home owners, and over half of under-35s, receiving funding from family or friends.

The average UK house price in England is now above £300,000 and the average in the capital is now £550,000; house prices in London rose 10.8% in 2015, whereas wages have risen by just 1.5% p.a. since the financial crisis.

Having benefitted from the windfall of booming property values, it makes sense for the older generation to pass this cash to the next generation, but the way in which this is done can lead to inequity either within families, as elder children may receive greater benefit, or between families, where some parents are able to contribute and others are not.

‘Family money can be passed up and down the generations to suit individual circumstances. But it can only be spent once’ Nigel Wilson, Legal and General

However, there are worrying signs that parental resources are being depleted beyond a level that could be considered manageable, leading to fears of a series of mini-financial crises in future years.

With prices seemingly moving inexorably upward, a higher and higher proportion of net household wealth is being dedicated to supporting house purchases by their children; L&G’s report identifies that families helping with a child’s house purchase are contributing more than a third of their net wealth towards that purchase. In London, that figure rises to over 50%, with the South East of England is close behind.

Fifty percent is considered a significant threshold as many may be facing insufficient pension provision and the spectre of exorbitant charges for residential care.

For many the option remains of releasing equity from the family home to supplement pension income and equity release schemes or lifetime mortgages are likely to become more common.

Family money can be passed up and down the generations to suit individual circumstances, but it can only be spent once and with longevity continuing to rise, the BOMAD may soon be forced to review its lending policy.

Family money can certainly not solve the crisis of housing supply and affordability, and in fact it may serve to exacerbate the problem by not being universally available and not being sustainable over the long term.

The Government has attempted to address the issue of affordability for first-time buyers with the Help to Buy ISA and the new Lifetime ISA, but whilst these may help some, ultimately they introduce more money into the system, increasing demand for housing, when its supply is the main issue.

It seems likely that the mortgage market will change with the traditional approach to repayment and outright ownership being replaced by longer term mortgages and equity release to fund retirement or help the next generation get started, but the fear is that this will fuel prices even further.

Renting may become more common as increasing transaction costs such as stamp duty rule out purchase all together and what is termed ‘right-sizing’ will be encouraged as a positive financial and lifestyle choice to free up family homes for the next generation.

However, the only real solution is to build more new houses for owners, renters and for older people alike, but closing the 100,000 p.a. gap between what is currently delivered and what is needed is a daunting task

Building on this scale requires a new approach: modern, modular construction techniques that are not constrained by shortages of skilled labour in the traditional building trades or lack of material.

Legal & General, which already has a pipeline of 75,000 homes built, financed or planned, is putting its weight and money behind this new approach.

Since the financial crisis new money created by central banks and governments has pushed up the prices of existing assets, and the housing market has become a bellwether for the wider economy.

As a result, many younger people are finding it impossible to get onto the housing ladder without parental assistance; however, with savings now being depleted at such a rate that there are concerns about the older generation being able to ride out any financial storms that may occur the only truly sustainable solution to the housing crisis is by getting more spades in the ground.

 





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