Bank of Mum and Dad the bank that likes to say 'Yes'
Even whilst interest rates are at or near record lows, few lenders can beat the rates offered by the Bank of Mum and Dad (BoMaD). For those in work and those with income, a consequence of the COVID-19 pandemic has seen savings rise and spending opportunities fell. Couple rising savings of the cash-rich with rising house prices and the doors to the Bank of Mum and Dad have been well and truly open during 2021 and Savills expect them to remain open for some time to come. Great news for those with an account with the Bank of Mum and Dad, but bad news for those without. With access to the Bank of Mum and Dad split roughly 50:50 should we aim to level up or level down?
Bank of Mum and Dad funding almost 50% of house purchases
The COVID-19 pandemic saw an increase in the number of First Time Buyers helped by the Bank of Mum and Dad, rising from just under 40% (4 in 10) in 2019 to almost 50% (one in every two) in 2021.
The share has been higher in the past, reaching 70% (seven out of ten) in 2009 in the jaws of the Global Financial Crisis before falling steadily to around 43% by 2016.
In our view, the drivers behind the recent growth in the Bank of Mum and Dad are different to the Global Financial Crisis. During the Credit crunch mortgage availability, especially at higher loan to value ratios (LTVs) was extremely constrained creating a funding gap. However, in 2021 mortgage availability is rising, but so are house prices and the bank of Mum and Dad is not stepping into the LTV gap, but the gap created by the divorce of house prices from wages and earnings.
The value of the Bank of Mum and Dad is rising
Perhaps more enlightening and worrying that the share of transactions assisted by the Bank of Mum and Dad is the huge increase in the value of contributions made by the Bank of Mum and Dad, rising from £6.1bn in 2020 to an estimated £9.8bn in 2021 an increase of more than 60% and it is expected to remain at elevated levels for the next few years.
Cause and effect are difficult to determine and whilst at a micro or family level the Bank of Mum and Dad makes a lot of sense (for those lucky enough to have access) at a macro or country and society level the lending activity of the Bank of Mum and Dad puts house prices out of reach for those without access.
If we equate use with access (which we appreciate is perhaps an oversimplifying assumption) this means just over 50% (one in every two) first-time buyers are trying to buy with one financial arm tied behind their back. The playing field is not level, and we are not sure that this is an area that the UK Government is seeking to level up.
The size of BoMaD 'loans' is also rising
Not only is the overall size of the Bank of Mum and Dad rising, but so is the size of the average contribution made by the Bank of Mum and Dad up from £37,000 in 2019 to £47,000 in 2020 and Savills expect it to rise to £58,000 in 2021.
The level of average Bank of Mum and Dad financial assistance had been fairly stable between 2009 and 2019 averaging around £39,000. This stability is interesting given that average UK house prices rose by 43% or £69,500 over the same period, suggesting to us that over this period mortgage availability was improving and that the Bank of Mum and Dad was filling the LTV gap.
The big increases in 2020 and 2021 suggest to us that the Bank of Mum and Dad are now filling the Loan to Income (LTI) gap rather than the LTV gap. The issue today, and it seems in the future will be mortgage capacity, not mortgage availability, which once again, in our view, is a consequence of the divorce between wages and house prices.
Bank of Mum and Dad and house prices
As already noted we believe that the Credit Crunch created an LTV gap for the Bank of Mum and Dad to fill, but that rising house prices during the COVID-19 pandemic have led to a Loan-to-Income Gap. The average bank of Mum and Dad contribution as a percentage of the average house price today is now similar to its level during the Global Financial Crisis at around 23% (although in absolute terms it is much bigger £58,000 today compared to £38,000 in 2009).
This financing or loan to income gap of £58,000 is very significant in a country where the median average full-time wage is around £32,000. This means that the loan to income gap is almost two years pre-tax earnings rising to 2 years 3 months if we consider take-home pay. These are figures known all to well for those without access to the Bank of Mum and Dad and it is easy to see why the UK Government is seeking to turn the UK into a high wage economy.
Should we level up or level down?
Whilst many are critical of help to buy for pumping money into an already heated housing market, those same critics are more than often silent on the inflationary impact of the contributions of the Bank of Mum and Dad. However, if one is inflationary then so is the other.
This leads us to the question should we, level down or level up?
Should we level down and take away the lending licence and close the doors of the Bank of Mum and Dad or should we level up and set up a bank of mum and dad for those without access to their own bank of Mum and Dad.
I am sure that supporters and detractors of both sides will voice their opinions with force and I am not suggesting that either approach is a perfect one, but what I am sure of is that if we do nothing then housing wealth inequality in this country will worsen and the gap between rich and poor will widen and the consequences of that are not good at all.