The Bank of Mum and Dad
There was a revealing insight this week into how the property market is being fuelled, despite improbably high property prices. Data from Legal and General has shown that £5bn of the money used as deposits on property comes from parents of the owners, or the Bank of Mum and Dad. Their average contribution of £17,500 is hugely significant, bridging the gap that makes a house affordable for a first-time buyer.
This is a nationwide issue. A poll undertaken by the Observer last week showed that 71% of people aspiring to buy believe they will need family help to do so. However it’s worse in London, where property prices are shooting up faster. The first house I owned was ideal for a first time buyer, a small one bedroom flat in zone three. I sold it in 2013, and since that time it has increased in value, recently being sold for 60% more. It is now beyond the reach of any first time buyer without them receiving considerable help. Knowing the flat, its current price is well above any rational valuation of what it should be worth. But the price exists because people are willing and able to pay it.
This is the crux of this particular problem. A parent caring about their children’s future is a natural thing. Helping them when they are in need is something the majority of parents want to do whenever they can. So when parents have the ability to help bridge the gap that allows their children to own a home, it is highly likely that they will do so. The effect is to boost their buying power, making the cost of the home they can afford higher. The trouble is that the supply side is smart, and responds by increasing the price. As a result the flat in Balham with three bedrooms that was affordable ten years ago isn’t anymore, with the same money now buying you a one bedroom flat in Tooting.
Asking parents to become less involved in helping their children is a long shot. This leaves a feeling of a rising water level that has already pushed out the majority of people buying a home using only their own funds. It is likely that the level will continue to rise until the majority can’t afford to buy, even with family assistance. So what happens then? Eventually, there will come a time when people no longer find the risk of buying a home palatable, when the price is just too high. A market correction will be necessary when that happens, and if the prices fall the people most affected will be those who own the smallest share, those that have borrowed the most.
There are a cocktail of demand factors that make London house prices increase that include things like buy to let, immigration (from within the UK as well as outside), foreign investment purchases and an economic focus on driving the UK economy from the South East. The supply side must respond to this, by creating more homes, or the price will just continue to increase. Ignoring cash buyers and investment vehicles, the housing sector is already relying on artificial methods like shared ownership and help to buy in order to get ordinary buyers to its current prices. Once the leap becomes too big we will break the flow of renters that move into home ownership. That’s not a particularly nice thought so it might be a good thing if the Bank of Mum and Dad’s market share does not need to grow any further.
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