25% of deposits funded by bank of Mum and Dad

[Sancho Panza]

Two days old,not sure if not posted yet.

loved the Henry Pryor quote.

Wolf St May 31 2018

'“Mum & dad are lending money to their kids so their kids can afford to pay the prices demanded by mum & dad & their friends. It’s like a giant Ponzi scheme but where the victims are your children.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

As the economic growth in the UK stutters — for the first quarter, the UK posted the worst GDP figures in five years on weak business investment and household spending — the country’s all-important housing market is beginning to show signs of strain. In April house sales were down 9.4% on the previous year. In the UK’s most valuable market, London, house prices had their worst month since 2009, slipping 0.7%, according to the latest figures from the Office for National Statistics (ONS).

As credit demand slips, some banks have decided to bring back a financial relic that should never have seen the light of day in the first place: the 100% mortgage. Both Barclays Bank and the recently privatized Post Office have recently unveiled 100% mortgage deals.

A high-risk loan instrument that helped fuel madcap property booms in countries like Spain and the UK, the 100% mortgage allows property buyers to borrow the entire amount of the purchase price. During the heady days of the UK’s pre-2008 property boom, some banks even offered loans that were 20% more than the property value. They included Northern Rock, one of the first lenders to collapse in the Global Financial Crisis.

Mortgages for 100% (or above) of the purchase price not only help fuel high-octane housing bubbles, they also make them a lot riskier when home priced decline, and when more and more borrowers end up with negative equity – where someone’s home is worth less than their debt. That, in turn, significantly raises the likelihood of borrowers defaulting on their loans. And that’s why these 100% mortgages are risky for banks.

Today’s new breed of 100% mortgages has a twist in its tail: to provide the banks extra security, they are insisting on family members acting as guarantors for parts of the loans. In other words, if a borrower falls behind on repayments, a parent’s home can also be put at risk.

This kind of deal is becoming increasingly common in the UK, where property prices still remain close to their all-time high despite fears prompted by Brexit and the recent cooling of London’s property market. Underpaid and over-indebted, many young people cannot afford to put down even a 5% deposit on houses whose prices, after they’re adjusted for inflation, have almost doubled in the last 20 years. And a 10% or 15% down-payment is totally out of reach. Their only hope of getting onto the “property ladder” is to get a financial leg up from their parents.

So widespread is this phenomenon that in 2017 the so-called “Bank of Mum and Dad” became the ninth biggest mortgage lender in the UK shelling out some £6.5 billion in loans. Parents helped provide deposits for more than 298,000 mortgages last year — the equivalent of 26% of all transactions. “The Bank of Mum and Dad continues to grow in importance in helping young people take their early steps onto the housing ladder,” said Nigel Wilson, chief executive of the financial service company Legal & General.

It is not driven purely by altruism. The UK’s multi-decade property boom, propelled by artificially low interest rates and supportive government policies, has provided a huge source of wealth for baby boomers. If the Bank of Mum and Dad didn’t lend this money to the new generation, demand for new mortgages would dry up and the UK’s multi-decade housing bubble would have begun to deflate some time ago. As a result, the houses that mum and dad own would lose much of their “value” and their respective net worth would plummet.

“Mum & dad are lending money to their kids so their kids can afford to pay the prices demanded by mum & dad & their friends,” explained buyers agent Henry Pryor. “It’s like a giant Ponzi scheme but where the victims are your children.”

More than one in four transactions in the UK’s property market this year will depend on the Bank of Mum and Dad’s financial support, according to Legal & General. The “bank” is expected to help fund 317,000 homes this year, up 3% on 2017. It’s not just twenty and thirty somethings that rely on its “lending”: 20% of those aged between 45 and 55 are also receiving some form of assistance.

There are two major problems with this trend:

One, only those with affluent parents get access to the cheap (if not free) funds. This further exacerbates the already high levels of wealth inequality in the UK. To lend their children a helping hand, some less moneyed parents may decide to remortgage their homes or serve as guarantors on the sort of mortgage deals mentioned above, but at the risk of losing their own properties in the process.

And two, the Bank of Mum and Dad does not have infinite resources at its disposal. In fact, while parents may be playing an increasing role in mortgage transactions, the actual amount they’re ponying up appears to be falling. Overall lending is expected to drop to £5.7 billion this year from last year’s peak of £6.5 billion.

“People are feeling a bit of a pinch around the economy and therefore we’re seeing pretty much a national trend outside of London for less to be given,” Nigel Wilson told the BBC. If that pinch continues to grow, the Bank of Mum and Dad could lose a large part of its liquidity. And with it, the UK’s housing market, which has provided a vital source of artificial wealth creation over the last three and a half decades, could lose its final pillar of support. By Don Quijones.'

Edited June 3, 2018 by Sancho Panza

[neon tetra]

Mmmm... delicious new funds...

[DisgruntledCynic]

It is not 25% - it is far higher than that. Young people like myself (early 20s) are coy to talk about parental help but my older doctor sister says every junior doctor she knew had parental assistance with property. Doctors!

If you don’t believe me, consider this: in NZ, a newspaper article I read once quoted 3 in 10 had BOMAD deposit funding. In another article pertaining to Nz’s overpriced market however 80% parents had helped a child at some point.

So you might be asking: well, what gives? The only explanation for the disparity and such a low figure is that FTBs are lying to pollsters. Why would parents lie?

The figure is simply false, not 25% but ~80%

doi: has help

[zilly]

Multi-generational wealth transfer to the banks...the financiers' nirvana?

They've really got their jackboot on our necks now - and aren't going to stop pressing down until the process of interest extraction completely ossifies our economy.

Next stop - the 50 year mortgage, a la Japan of 30 years ago.

[ccc]

Way higher than 25%.

[Smiley George]

29 minutes ago, zilly said:

Multi-generational wealth transfer to the banks...the financiers' nirvana?

They've really got their jackboot on our necks now - and aren't going to stop pressing down until the process of interest extraction completely ossifies our economy.

100% this......there are intelligent people out there in this BOMAD cohort, but how they can't see the stupidity in all this makes me despair -  it's fuelled by one thing ....greed.

[Yellow_Reduced_Sticker]

28 minutes ago, ccc said:

Way higher than 25%.

Agree, i'd say nearer 40%

[PopGun]

11 hours ago, Sancho Panza said:

'“Mum & dad are lending money to their kids so their kids can afford to pay the prices demanded by mum & dad & their friends. It’s like a giant Ponzi scheme but where the victims are your children.”

It's fooking crazy.

[Yellow_Reduced_Sticker]

  11 hours ago, Sancho Panza said:

'“Mum & dad are lending money to their kids so their kids can afford to pay the prices demanded by mum & dad & their friends. It’s like a giant Ponzi scheme but where the victims are your children.”

It just shows how much of the population are SHEEPLE!

 

[Sugarlips]

Friends have turned the idea on its head recently. Rather than extracting their parents equity and buying a lifetime of debt servitude and risk losing the lot incl the family home, they’ve taken half their parents back yard and built a sustainable home on it.

 

Appreciate this won’t work for a lot of people esp if you can’t get on with your olds but with recent town planning rules being relaxed (by govt force) and the tiny house movement still gaining in popularity (their square metre-age is favourable for our smaller sized gardens), it’s a better option than renting a dive for half your paycheque every month or being enslaved by the bank...

[CanAffordWontPay]

It's obviously going to be area dependent. I would say south east would be high as 80%+. Anecdotally all my friends and colleagues that have bought over the last 5 years or so have all had help from parents (usually both sets if a couple). Most recently it's additional help grandparents and the government. Hearing my friends talk about grandparents/parents now it's really quite depressing especially in regards to inhertiance they expect.

[ftb_fml]

Posted this in the other recent BOMAD therad, but it's getting more attention here so it's all good

I do love Wolf Street - astute and objective observations summarised in an easily digestible format that's nice and easy to understand...

[Wayward]

Lending money to family...what could go wrong I wonder???.  Many of these 'loans' will result in disputes, bad feeling and fallings out.  Sad really.  And all this human misery is by design...to fulfil the greed of the established wealthy.

[Sancho Panza]

4 hours ago, ccc said:

Way higher than 25%.

I think the 25% may refer to those who receive formal documented help ie parents are second charge or bank is aware there is a loan for deposit.

If you just lend your offspring money and don't document it,then there's no way the L&G will know about it.

 

2 hours ago, ftb_fml said:

Posted this in the other recent BOMAD therad, but it's getting more attention here so it's all good

I do love Wolf Street - astute and objective observations summarised in an easily digestible format that's nice and easy to understand...

Wolf St has become my go to web page for financial journalism.Really top quality analysis that touches subjects the MSM leaves well alone.

Unlike Mish Shedlock-who's a similarly good read-Wolf takes a far closer look at specific businesses.

[ftb_fml]

5 minutes ago, Sancho Panza said:

Wolf St has become my go to web page for financial journalism.Really top quality analysis that touches subjects the MSM leaves well alone.

Unlike Mish Shedlock-who's a similarly good read-Wolf takes a far closer look at specific businesses.

Absolutely - I have no head for many of the subjects that affect us so greatly yet the establishment wishes us to keep us in the dark regarding (politics & economics) yet Wolf Street really lays it out nicely and really picks out the important stuff IMO.

My only wishes would be that there was more stuff relevant to Britain and that there was a bit more content, however neither are really legitimate criticisms and I'd rather not have to wade though reams of irrelevant doom-porn to get to the good stuff!

Ta for the mention of Mish Shedlock - I'm not familiar and will take a look

[austrianec]

I believe the 26% is of all house purchases (298,000 is 26% of about 1.15 million which sounds like the annual sales volume for all houses, not just FTB). So, assuming that at these bubble prices 'second-steppers' are generally using equity to trade up (if they're moving at all), that's going to be the majority of FTB

[Gigantic Purple Slug]

At an individual level I don't see the problem with parents helping their kids out. After all, if you've got a spare xk hanging around what good is it doing sitting in the bank vs. helping your kids/grandkids get a house.

On the other hand the fact that parents need to help their kids out like this is obviously an issue and unfair on people that don't have the access to wealth.

[Sour Mash]

49 minutes ago, Gigantic Purple Slug said:

At an individual level I don't see the problem with parents helping their kids out. After all, if you've got a spare xk hanging around what good is it doing sitting in the bank vs. helping your kids/grandkids get a house.

On the other hand the fact that parents need to help their kids out like this is obviously an issue and unfair on people that don't have the access to wealth.

 

People from a relatively wealthy background enjoy may advantages compared to those who don't have access to family wealth - do you propose to confiscate and redistribute wealth 'for the good of the state'?

At the end of the day, people can choose to gift their wealth (if they have any) any way they like.  Might be annoying that it is a prop for HPI but too bad.  I doubt that it's going to be a long term thing as the 'wealthy boomers' are wealthy chiefly by virtue of their owned property assets and generous pensions.  Property value can drop very quickly and their pensions go with them to the grave.

 

[Gigantic Purple Slug]

1 minute ago, Sour Mash said:

 

People from a relatively wealthy background enjoy may advantages compared to those who don't have access to family wealth - do you propose to confiscate and redistribute wealth 'for the good of the state'?

At the end of the day, people can choose to gift their wealth (if they have any) any way they like.  Might be annoying that it is a prop for HPI but too bad.  I doubt that it's going to be a long term thing as the 'wealthy boomers' are wealthy chiefly by virtue of their owned property assets and generous pensions.  Property value can drop very quickly and their pensions go with them to the grave.

 

No not at all.

I propose that the government stop coming up with "schemes" to inflate house prices, disencourage BTL and build enough houses so prices are affordable and parents don't have to help.

[maverick73]

The current setup is causing a wealth trap... the values being positioned are circumstantial demand. Through all the quantitative easing pumped through the market, you'd expect everyone to be swimming in pools of money....

Have salaries gone up - Slightly, because of push side inflation (After 10 years).

Are more house being built - It depends on point of view, at present construction has halted.

Are house being sold - Rate of sale transactions have declined.

Employment Market - Self employment is on the rise, yet the rate of return is less than 2008; Retail & manufacturing jobs are declining; Service sector is flatlining.

Inflation - Above 2%

[longgone]

11 hours ago, Smiley George said:

100% this......there are intelligent people out there in this BOMAD cohort, but how they can't see the stupidity in all this makes me despair -  it's fuelled by one thing ....greed.

The so called intelligent out there seem to have the least common sense. 

[Arpeggio]

1 hour ago, longgone said:

The so called intelligent out there seem to have the least common sense.  

Maybe it's the way boomers are programmed. They've been shaped into this.

"If you don't move out of your parents house you're a not a real man" or by the same token "If your kid still live with you, you've given birth to a loser".

The general narrative in the media and many a newspaper article (up until about 2012).

as opposed to the 1930's less self-conscious, less wimpy faggoty, more manly version "I lived with my parents then went off to fight and risk death for my country and hope to make it back".

Edited June 4, 2018 by Arpeggio

[honkydonkey]

9 hours ago, Arpeggio said:

Maybe it's the way boomers are programmed. They've been shaped into this.

"If you don't move out of your parents house you're a not a real man" or by the same token "If your kid still live with you, you've given birth to a loser".

The general narrative in the media and many a newspaper article (up until about 2012).

as opposed to the 1930's less self-conscious, less wimpy faggoty, more manly version "I lived with my parents then went off to fight and risk death for my country and hope to make it back".

But once I returned a battle hardened warrior the government seemed ever so keen to accommodate me.

[longgone]

10 hours ago, Arpeggio said:

Maybe it's the way boomers are programmed. They've been shaped into this.

"If you don't move out of your parents house you're a not a real man" or by the same token "If your kid still live with you, you've given birth to a loser".

The general narrative in the media and many a newspaper article (up until about 2012).

as opposed to the 1930's less self-conscious, less wimpy faggoty, more manly version "I lived with my parents then went off to fight and risk death for my country and hope to make it back".

"if you don`t move out of your parents house you are not supplying the system with another rent stream or debt boom"

= cheaper housing. 

i have done both so i guess i have returned to loser status 

Trainspotting got it right. 

Choose Life. Choose a job. Choose a career. Choose a family. Choose a f*cking big television, choose washing machines, cars, compact disc players and electrical tin openers. Choose good health, low cholesterol, and dental insurance. Choose fixed interest mortgage repayments. Choose a starter home. Choose your friends. Choose leisurewear and matching luggage. Choose a three-piece suit on hire purchase in a range of f*cking fabrics. Choose DIY and wondering who the f*ck you are on Sunday morning. Choose sitting on that couch watching mind-numbing, spirit-crushing game shows, stuffing f*cking junk food into your mouth. Choose rotting away at the end of it all, p*ssing your last in a miserable home, nothing more than an embarrassment to the selfish, f*cked up brats you spawned to replace yourselves. Choose your future. Choose life... But why would I want to do a thing like that? I chose not to choose life. I chose somethin' else

[Sour Mash]

It's not just deposits for houses, parents are increasingly providing general financial support for their adult-age children in terms of bunging them money to pay off credit cards and loans.

Makes you wonder what is going to happen when the current 'boomer' generation are tapped out/die off.  I can't see the next  generation of parents being in any sort of position to pass wealth to their kids if they were relying on their own elders for support.