Britain’s Inherited Property Wealth Issue: The Bank of Mum and Dad Creating Barriers for Others
Becoming a homeowner used to symbolize the transition into adulthood, but in recent times, it has become an increasingly challenging goal to achieve without early inheritance from family. The relentless surge in house prices has far outpaced wage growth, and now, with soaring mortgage rates, the situation has become even more painful.
The reality is that buying a property without substantial assistance from parents, either in the form of a hefty deposit or free accommodation while savings are gathered, has become nearly impossible. Consequently, those who lack family financial support are left renting for longer periods, often indefinitely.
This reliance on the “Bank of Mum and Dad” is not just an individual struggle but contributes to wider societal issues. Economists have flagged this trend as a key driver of inequality, declining rates of homeownership, and a potential future retirement crisis. Moreover, it is hindering businesses’ efforts to fill job vacancies, as those without parental wealth find themselves priced out of major cities.
The Rising Dependency on Parents
A significant number of Britons now rely on their parents to get a foothold on the property ladder. According to estate agents Savills, three out of five first-time buyers this year (63%) are expected to receive help from their parents to buy a home, the highest level since 2011. Last year, family assistance accounted for about 46% of all first-time buyers with mortgages, with 170,000 benefiting from parental support.
The cost of this aid is considerable, with parents spending a staggering £8.8 billion to help their children in the past year. The need for such assistance has surged due to increasing mortgage rates, as buyers are forced either to consider more affordable properties or seek additional financial help from their parents.
A Struggle to Save for a Deposit
Soaring house prices, particularly in London and southern England, have made purchasing a home exorbitantly expensive. Housing affordability fell to the lowest level in 150 years in 2022, with house prices reaching over nine times the average salary, a ratio unseen since 1876. The substantial increase in the cost of homeownership has far outpaced income growth, making it necessary for buyers to accumulate larger deposits to manage their mortgage repayments.
The average first-time buyer today typically requires a 25% deposit, averaging £63,500, compared to an average deposit size of under £25,000 in 2005. Simultaneously, mortgage loans have doubled in size over the same period, escalating from around £105,000 to £195,000.
Escalating Mortgage Costs
Mortgage rates have risen significantly in the last two years, adding to the burden of amassing a substantial deposit. Two-year mortgage rates have jumped from 2.59% to 6.8%, and five-year rates have risen from 2.82% to 6.32%. While many experts expect these soaring rates to dampen house prices, the decline in affordability has not yet been fully offset by price decreases.
In a scenario where mortgage rates remain at 6%, over half (56%) of people’s incomes could go towards mortgage repayments, levels not seen since the late 1980s. First-time buyers with 90 or 95% mortgages face even higher mortgage costs, as they must cope with the limited availability of competitive rates with smaller deposits.
The End of Help to Buy
To assist buyers in saving for a deposit, the government introduced the Help to Buy scheme in 2013. However, the scheme has since come to an end, potentially exacerbating the need for parental support. While Help to Buy allowed first-time buyers to secure a property with just a 5% deposit, its closure may have implications for future buyers’ ability to enter the market without significant financial assistance.
Critics argue that the scheme contributed to inflated house prices, making homeownership even more unattainable for many individuals.
Threats to Social Mobility and Homeownership Rates
The growing dependence on parental support to purchase a home perpetuates wealth inequality and hinders social mobility in the UK. Those with wealthier parents are far more likely to receive financial gifts, creating a scenario where homeownership and renting become increasingly tied to family wealth and income rather than personal achievements and earnings.
Falling homeownership rates among younger people have led to prolonged periods in the private rented sector, where housing costs consume a more substantial portion of their income. This leaves individuals with reduced financial resilience later in life, and many first-time buyers now face paying off their mortgages until they reach the age of 64, the highest age recorded since 2005.
Impact on Pensions
The prolonged struggle to buy a home and the associated costs may impede the ability of the current generation to save for retirement. With homeownership taking longer and costing more, many individuals may have to downsize as they approach retirement to fund their golden years. In some cases, renting in old age has become a financial necessity, which can significantly impact retirement finances.
The Unaffordability of Buying Property
Rampant house price growth fueled by low-interest rates, combined with limited housing supply, has created a situation where first-time buyers often find themselves competing with buy-to-let investors, driving prices upwards. While certain policy measures, such as additional stamp duty rates, have sought to address this issue, they have not fully alleviated the challenges faced by first-time buyers over the past few decades.
Conclusion
– The UK is facing a hereditary property wealth problem, with increasing reliance on the “Bank of Mum and Dad” for assistance in buying homes.
– Soaring house prices have outpaced wage growth, making it difficult for first-time buyers to afford homes without parental help.
– Three out of five first-time buyers rely on parental assistance to purchase a home, reaching the highest level since 2011.
– The average first-time buyer now needs a 25% deposit, which is about £63,500, compared to under £25,000 in 2005.
– Mortgage rates have surged in the past two years, further increasing the need for substantial deposits to manage repayments.
– The government’s Help to Buy scheme, which assisted first-time buyers with a 5% deposit, has ended, potentially worsening the situation.
– This trend is exacerbating wealth inequality and hindering social mobility, as homeownership becomes increasingly linked to family wealth.
– Falling homeownership rates among younger people result in longer periods of renting, impacting financial resilience later in life.
– The prolonged struggle to buy a home may affect the ability of the current generation to save for retirement.
– Low-interest rates and limited housing supply have fueled rampant house price growth, creating challenges for first-time buyers.
– Comprehensive policy measures may be necessary to address the root causes and promote a fair and open economy.
In conclusion, the Bank of Mum and Dad has become a crucial source of support for aspiring homeowners in the UK. However, this growing dependency not only exacerbates wealth inequality and reduces social mobility but also has wider implications for the housing market and the future financial stability of the younger generation. The solution to this hereditary property wealth problem may lie in comprehensive policy measures aimed at addressing the root causes of unaffordable homeownership and promoting a fair and open economy.