May Rostom
On average, parental contributions help children buy homes four years earlier than those without them. Out of every 100 new homeowners below the age of 30, 16 will have had help from ‘the Bank of Mum and Dad’, or Bomad for short. That rises to one in four new homeowners under the age of 25. Those who have had help from their parents put down a deposit twice as large, bought bigger first homes, and had smaller mortgage payments than those who did not. Anecdotes about cash assistance from Mum and Dad have recently been backed up by evidence from Legal & General, which implies Bomad plays a non-trivial role in the housing market. I attempt to investigate its prevalence.
I perform 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 amassed from earnings alone since entering the workforce. Then I compare that number to the size of their down-payment. If it is greater than their estimated savings, I assume they got help. Otherwise, I assume they did not.
I observe demographic information only at the point of mortgage issuance, not before. So to estimate cumulative savings, I make three rough assumptions. One, I assume people are in full-time education until they are 20, after which they start working. Two, I assume no one is ever unemployed. Three, I assume that past incomes and expenditures were at least as high as what was reported at the time of mortgage issuance. These will overestimate income and expenditure, but together should give a reasonable read on savings. Of course, the reality is far more complex. However, the assumptions are sufficiently conservative in that they are likely to understate the importance of parental support.
These are the takeaways.
First, getting help is fairly common. Chart 1 shows over 10% of first-time buyers (FTBs) younger than 45 are getting financial help from someone else. This number rises to 28% for the under 25s.
Chart 1: Proportion of FTBs getting help in 2015–17
Source: Product Sales Database. Data are pooled from 2015 Q1–2017 Q1 inclusive for FTB borrowers. Getting help is an indicator variable equal to one if after-tax income minus expenditures is greater than the deposit.
Second, the support is substantial. Chart 2 shows that, on average, deposits are two and a half times larger, loans are 30% smaller, and houses cost £15,000 more for those getting help, compared with those who are not. This means ‘Bomad borrowers’ are typically less-leveraged and have lower mortgage payments, leaving more leeway for them to save or spend their incomes on other things.
Chart 2: Purchased house price by help
Source: Product Sales Database. Data are pooled from 2015 Q1–2017 Q1 inclusive for FTB borrowers. Getting help is an indicator variable equal to one if after-tax income minus expenditure is greater than the deposit.
Third, recipients of financial support buy their first homes earlier – on average four years earlier, at the age of 26 instead of 30. And, as above, they tend to buy more expensive homes.
We can work out just how much earlier those with assistance buy a house for a given price 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 help paid about £254,000 for their first home. Those with no help waited a decade – until they were 37 – to buy a property for an equivalent sum.
Chart 3: House prices by age
Source: Product Sales Database. Data are pooled from 2015 Q1–2017 Q1 inclusive for FTB borrowers. Getting help is an indicator variable equal to one if after-tax income minus expenditure is greater than the deposit. This chart plots the mean property price paid (y-axis) for FTBs by the age (x-axis) when they purchased the property.
Here is a true story. I have three British friends, all the same age, all unrelated. They all earn roughly the same amount of money in similar jobs, which they worked hard to get and work harder to keep. They are all equally smart and have achieved comparable schooling. My friends are obviously not identical in many ways, but there is, however, one big difference between them.
The first one got significant help at a young age to buy a flat. With this investment, they were able to upsize into a large home in a leafy London neighbourhood about 10 years ago. The second got some – but less – help to buy a flat and it occurred several years later. A couple of years before the pandemic, they moved into a small house an hour’s commute from London (this may matter less now, but it did at the time). The third has received no financial help at all. They have been trying to buy a flat for as long as I can remember.
What are the consequences of these differences in timing and loan size? There are many, and economists should think about what they mean.
Many organisations are speaking about the struggles of UK housing affordability. I have written about it too, for example in the context of generational imbalances. This piece adds to this work, demonstrating that whether and when you receive a gift can affect your entire homeownership trajectory – exacerbating the differences not just across generations, but within them.
May Rostom works in the Bank’s Monetary Policy Outlook Division.
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