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SPECIAL FEATURE: Relying on Bank of Mum and Dad

Robyn Hall

September 19, 2013

It was encouraging to see more good news from the Council of Mortgage Lenders last month.

According to their Q2 figures released in August, there were 25,300 loans advanced to first-time buyers in June 2013, which was an increase of 30% on the 19,400 loans in June 2012.

Added to the healthy first-time buyer activity in May (the strongest individual month since late 2007), this brought lending to the sector to its highest quarterly level since 2007 – with 68,200 loans for purchasing a first home successfully completing in the second quarter of 2013.

First-time buyers accounted for 46% of all house purchase loans in June, which was up from 44% in May and considerably higher than the 38% seen on average since 2007.

So why the sudden resurgence in first time buyers?

Certainly the relaxation of lending criteria and introduction of lower FTB rates by some lenders in response to the government’s Funding for Lending scheme appears to be tempting some to tread hopefully on the first rung the property ladder.

Also, assistance from the first phase of the Help to Buy scheme will certainly be playing its part by reducing the initial deposit required on a new build home to 5%. (Very easy to overlook that the other 15% has to be paid back eventually. One more time bomb waiting when they have to start paying interest on it after five years, at a time when interest rates are likely to be significantly higher than now. But that’s another story).

Don’t get me wrong, I love good news, I just wish I could help looking behind it.

House prices are already on the rise. Many of the regular indices indicate a ‘robust’ increase in property prices (not just in the South East) and the average home is now valued at just short of £170,000.

The average mortgage taken out by first time buyers in June was £117,000 – up from £112,500 in May. At a time when real incomes have been falling for years, rising property prices are not good news. Higher prices have consequences far beyond the feel good factor for those of us fortunate enough to have got on the property ladder earlier when the relationship between incomes and property prices was less challenging, and we weren’t saddled with such large student loans. Equally, the relief that higher prices bring to those who bought at the peak and are still in negative equity does not outweigh the potential harm of artificially re-inflating of the property bubble while the market has not fully corrected from the last boom.

Today’s first time buyers are getting taxpayer assistance as part of a package designed to stimulate the housing market for largely political ends. The Government is coming under increasing pressure to drop the scheme, specifically because of concerns over its potential to stimulate demand, counter to the market fundamentals, and so take us back into bubble territory.

There has been particular pressure to cancel the planned second phase next year in which the same assistance would be extended to purchasers of both existing and new properties costing up to £600,000. Existing homeowners and people of all ages will be able apply for what is effectively an interest free loan for five years before it’s rolled into their mortgage.

The decision to bestow such private benefits with public money is questionable in itself – especially in this “time of austerity” – but the fact that these measures will effectively yield benefits for today’s property buyers at a cost to later generations does seem essentially wrong.

However, with an election on the horizon, I wouldn’t hold your breath for Mr Osborne to change his mind any time soon. Pumped up house prices could be very useful for getting traditional Conservative voters back onside.

As prices rise, so will the reliance on the Bank of Mum and Dad.

Over recent years, access to the “Bank of Mum and Dad” has become the make-or-break factor for would-be, first-time buyers. While they may no longer have to get a 20% cash deposit together, they will still have to save a significant sum, at a time – and probably a stage in their careers – when earnings simply do not keep pace with the cost of living. And now as they start to see house prices rising too, they find themselves with a growing sense of urgency to “get on the ladder”.

Recent research from housing charity Shelter revealed that parents are collectively paying out £2 billion a year to help their children buy their first home. More than a quarter of first-time buyers are still reliant on parents to help them raise a deposit compared to less than one fifth before the financial crisis struck, according to the research. Add in the new dynamic of parents observing house price rises and it’s reasonable to anticipate that many more of them may be on the cusp of joining the fray, to try to get the kids set up before prices “take off again”.

Like it or not… and in this case I really don’t.

However, every problem is an opportunity

The fact that the “Bank of Mum and Dad” now has to play such a central role in our housing market means that intermediaries should – if they’re not already – actively promote their expertise to parents as a route to securing their kids as clients.

If you’re having a quiet week, why not put together a marketing campaign targeting parents?

One simple communication piece could focus on the government’s Help to Buy scheme as a potential benefit for both the child and the parent. Intermediaries could outline how the scheme operates including the deposits that will be required. It could offer some comfort to parents worried about helping their children with sizeable deposits, establishing a limit to their financial involvement that is within their comfort zone in terms of the impact on their own savings, outgoings and retirement planning.

I believe that intermediaries could reap the benefits by proactively engaging with this audience who could well influence the actions of their children.

There’s one thing that will never change for any generation of first time buyers; they don’t know what they don’t know. And certainly, if I were stumping up several thousand to help my son or daughter, I would want a say in how they sourced the mortgage and supporting insurances.

One has to wonder though, what will happen a few years down the road? How many Generation Y parents will have been able to build up adequate resources to do the same thing for their millennial offspring?

Will the Bank of Mum and Dad then also be considered “too big to fail”?


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