Rising house prices and more stringent affordability criteria on lending is making it increasingly difficult for first-time buyers to afford a home of their own. It’s therefore unsurprising that more and more young people are relying on the Bank of Mum and Dad in order to get a foot onto the housing ladder.
In fact, recent research by Legal & General suggests that by the end of 2017, parents will have lent their loved ones a staggering £6.5 billion to help them buy a home; that’s a 30% increase on last year and means that parents will be involved in more than 25% of UK property transactions. (1) It also makes the ‘Bank of Mum and Dad’ equivalent to the ninth largest mortgage provider in the UK. (2)
In total, just over a quarter of home owners say they received help to buy, and for those under 35, that figure rises to 62%, highlighting that increasingly, it’s the only way for young adults to get on the housing ladder. (2)
So why are young people finding it so difficult to buy their own homes?
With mortgage rates at record lows, few young people would struggle to make the repayments, however the requirement to raise a large deposit is the biggest barrier to home ownership for young people.
House prices are rising faster than most people can save due to rock bottom interest rates and slow wage growth, and the faster prices rise, the more aspiring home owners feel the pressure to buy now. The result – the market is running away from them.
The average price for a first home is now at an all-time high of £207,693 and the average first-time buyer deposit is just under £33,000 equating to 16% of the purchase price. (3) When you consider that the average UK annual salary is approximately £27,000 (and even less for people under 30), (4) it is clear that saving for a deposit is not going to be easy.
In addition to this, wealth inequality across the country is twice as great as income inequality, with the wealthiest 10% of households owning 45% of the country’s wealth, while the least wealthy half of all households own just 9%. (5) The Institute for Public Policy Research highlighted the wealth discrepancies between age groups, noting that fewer than half of millennials are expected to own their own home by the age of 45 based on current market trends.
Therefore, young people who cannot afford to buy their first home are faced with two options:
Option 1. Multi-generation living (living at home with Mum and Dad)
Many young people make the decision to stay living at home, or to even move back home from rented accommodation, whilst trying to save for a deposit.
According to research conducted by Aviva, in the UK an estimated 1.2m people aged between 25 and 34 still live at home; a figure that has increased by 37% over the last 10 years. (6)
The growing trend for multi-generational living coincides with a 45% increase in house prices for first-time buyers and, if the trend continues, it’s predicted that a further half a million people aged 25 to 34 will be living with parents in 10 years’ time. (7)
Of the young people still living at home, 60% stated they were still living with Mum and Dad as they were unable to afford to move out while 48% said they were living at home in order to save money.
Option 2: Living in rented accommodation
Young people who wish to live independently but do not have the deposit required to buy their own house often find themselves living in rented properties whilst trying to save. And the longer it takes to save for a deposit, the longer they rent.
That, in turn, is pushing up rental demand and prices, and with higher rent it becomes almost impossible to save. As a result, the Bank of Mum and Dad is often called upon to help with covering some of the rental costs. Research suggests that one in 10 renters in the UK (9%) receive help from family and friends to pay their rent. (8)
How much is the Bank of Mum lending by region and will they ever be repaid?
Interestingly, the amount per transaction contributed by the Bank of Mum and Dad varies geographically… Parents in the South West of England on average contribute the most with around £30,000 per transaction. This is even more than in London where the average contribution per transaction is £29,400. On the other side of the scale average contribution values in Scotland and Wales average at £15,500 and £12,500 per transaction, respectively. (1)
Out of the young people who received money towards a deposit to buy, 57% received the money in the form of a gift, 18% as a loan with no interest and 5% as a loan with no interest. (9)
Across the UK, friends and families are helping where they can, whether that’s with rental or purchase costs. However, it’s very clear that the next generation is set to have less wealth than those before them. So it’s certainly not going to get any easier for young people to get onto the property ladder.
Carys Roberts, from the IPPR Commission on Economic Justice, said: “The old social contract in which each generation could expect more wealth than the last is broken. We’ve found that the vast majority of people now expect young people today to have less than the previous generation in housing wealth and savings, and more debt.” (5).
We’ve been lucky that the older generation controlling the lion’s share of the nation’s wealth is so generous to those following after. But what happens to the next generation when the Bank of Mum and Dad no longer exists? Only time will tell…
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