May Rustom
On average, parental contributions help children buy homes four years earlier than those who don’t. Out of every 100 new homeowners under the age of 30, 16 will get help from a “mother and father’s bank,” or Bomad for short. This rises to one in four new homeowners under the age of 25. Those who got help from their parents put down twice as much deposit, bought larger first homes, and had smaller mortgage payments than those who didn’t. Anecdotes about cash assistance from mom and dad have recently been backed up by evidence from Legal & General, which suggests Bomad is playing a non-trivial role in the housing market. I’m trying to investigate how widespread it is.
I do a simple calculation using administrative data that records borrower demographics and loan details on all new mortgages issued in the UK between 2015 and 2017. First, I estimate the cumulative savings each borrower could have accumulated from earnings alone since entering the job market. Then I compare that number with the size of the first batch. If it’s greater than their estimated savings, I assume they get help. Otherwise, I assume they wouldn’t.
I only notice demographic information when the mortgage is issued and not before. So to estimate cumulative savings, I make three rough assumptions. First, I assume people are in a full-time education until they’re 20, after which they start working. Secondly, I suppose no one is ever unemployed. Third, I assume that past incomes and expenses were at least as high as what was reported at the time the mortgage was issued. These will overestimate income and expenses, but together should give a reasonable reading on the savings. Of course, the reality is much more complex. However, the assumptions are sufficiently conservative in that they are likely to underestimate the importance of parental support.
This is the takeaway.
First, getting help is fairly common. Chart 1 shows that more than 10% of first time buyers (FTBs) under the age of 45 get financial assistance from someone else. This number rises to 28% for those under 25.
Chart 1: Percentage of FTBs receiving assistance in 2015-2017
Source: Product Sales Database. Data was compiled from the first quarter of 2015 to the first quarter of 2017, including the first quarter of 2015, for FTB customer borrowers. Getting help is a variable index equal to one if after-tax income minus expenses is greater than the deposit.
Second, the support is great. Chart 2 shows that deposits are, on average, two and a half times larger, loans 30% smaller, and homes cost an extra £15,000 for those who get help, compared to those who don’t. This means that “Bomad Borrowers” are usually less wealthy and have lower mortgage payments, leaving more room for them to save or spend their income on other things.
Chart 2: The price of a home purchased with assistance
Source: Product Sales Database. Data was compiled from the first quarter of 2015 to the first quarter of 2017, including the first quarter of 2015, for FTB customer borrowers. Getting help is a variable index equal to one if after-tax income minus expenses is greater than the deposit.
Third, financial aid recipients buy their first homes early — on average four years early, at age 26 instead of 30. And as mentioned above, they tend to buy more expensive homes.
We can determine how much those with assistance bought a home at a given price early by looking at the horizontal distance between the pink and blue lines in Chart 3. The results are extraordinary. The average 26-year-old with a helping hand paid around £254,000 for their first home. Those who did not receive assistance waited a decade—until they were 37—to buy property for an equivalent amount.
Chart 3: Housing prices by age
Source: Product Sales Database. Data was compiled from the first quarter of 2015 to the first quarter of 2017, including the first quarter of 2015, for FTB customer borrowers. Getting help is a variable index equal to one if after-tax income minus expenses is greater than the deposit. This graph plots the average property price paid (y-axis) for FTBs by age (x-axis) when the property was purchased.
This is a true story. I have three British friends, all of the same age, and all of whom are unrelated. They all make about the same amount of money in similar jobs, which they’ve worked hard to get and work even harder to keep. All of them are equally intelligent and have achieved a similar education. It is clear that my friends are not identical in many ways, but there is a huge difference between them.
The former was greatly helped at a young age to buy an apartment. With this investment, they were able to upsize to a large home in a leafy neighborhood of London about 10 years ago. The second had some help – but a little help to buy an apartment and it happened several years later. Two years before the epidemic, they had moved to a small house an hour from London (this may be less important now, but it was then). The third received no financial aid at all. They tried to buy an apartment as long as possible.
What are the consequences of these differences in timing and loan size? There are many more, and economists should think about what they mean.
Many organizations report on the struggles of housing affordability in the UK. I have also written about it, for example in the context of generational imbalances. Adding to that work is this piece, showing that receiving a gift can affect the trajectory of your entire home ownership—exacerbating differences not just across generations, but within them.
May Rostrom works in the bank’s monetary policy forecasting department.
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