In a recent speech to the UK Finance Annual Mortgage conference, Chris Woolard, executive director of strategy at the FCA, quoted a telling statistic: in 1997, 55 per cent of 25 to 34-year-olds owned their own home.
Twenty years later that figure had fallen to 35 per cent. The latest publication from research and policy think tank the Resolution Foundation seeks to explain why. ‘House of the rising son (or daughter): The impact of parental wealth on their children’s homeownership’ highlights the close correlation between parental support and people’s chances of becoming homeowners.
The rise in house prices means that homeownership is out of the reach of many. Mr Woolard’s speech also contrasted the rise in prices – up 173 per cent since 1997 – with the 19 per cent rise in average incomes for 25 to 34-year-olds over the same period.
Given today’s low interest rates, monthly mortgage payments are not usually the problem for most homebuyers. The biggest hurdle is raising the deposit. The report found that a 27 to 30-year-old saving for a deposit from their own disposable income would take around 18 years to do so. Twenty years ago it would have taken someone in the same age group only three years to raise a sufficiently large deposit.
The rise of Bomad
It is no surprise, therefore, that buyers rely increasingly on the so-called Bank of Mum and Dad to raise the deposit for buying their home. Resolution Foundation claims that the regulatory and lending environment also contribute to the influence of Bomad, as typical loan-to-values have fallen and thereby increased the required level of deposit.
However, lenders have made it easier for parents and friends to make use of their property wealth to support their children. Around 60 per cent of building societies accept finances from family and friends as a deposit, a third allow the family property to be used to reduce interest payments, and 10 per cent offer family offset mortgages.
The report finds that 30-year-olds whose parents do not have property wealth are 60 per cent less likely to be homeowners.
Acknowledging that homeownership, earnings and wealth are deeply intertwined, the report states that not only are those with wealthier parents more likely to own their own home, they are also more likely to have attended university and to earn more. Because these factors are closely related to the ability to purchase a home, the think tank says Bomad effectively pays out more than once in life.
The consequences
Since housing is an increasingly important determinant of living standards, there is concern about low levels of homeownership and high housing costs among younger people. On top of that, renting is more costly and less secure.
Chart 1 provides homeownership rates for four groups of 20 to 35-year-olds. The first group’s parents have no property wealth, while Group one is in the bottom third of housing wealth distribution, Group two is in the middle and Group three is in the top third. This clearly indicates that the probability of someone owning a house increases in line with parental property wealth.
Resolution Foundation warns that governments need to try to level the playing field, particularly when it comes to the issue of deposits. While it believes schemes such as Help to Buy can help, it suggests half the people who have used the scheme could probably have managed without. Its point is that such schemes need to be better targeted, given roughly 25 per cent of buyers using the scheme had income of £60,000 or more.
Calling for more concerted action to raise supply and rebalance demand in the housing market, the report warns if current trends continue, whether or not someone can own their own home will increasingly depend on who their parents are.
