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Posted on 27 Sep 2016 by Gareth Brown
Do you believe this chart?
I don’t. Not for a second.
I want to believe it. I fear that several Australian property markets are in the grip of something that starts with a ‘B’ and ends with an ‘UBBLE’. Several people I follow and admire on Twitter retweeted the chart. It was derived from a monthly survey by Digital Finance Analytics of around 26,000 households. That sure sounds statistically significant to me. A unprecedented increase in lending by parents (the so-called Bank of Mum and Dad) to First Time Buyers (FTB) of Australian property would be supportive of the bubble thesis.
But we always must be on guard for confirmation bias in our thinking.
If I’m reading it correctly, this chart is making a rather extraordinary claim.
Bank of Mum and Dad loans up 4,300%?
It suggests that the percentage of first time buyers getting help via a loan from the Bank of Mum and Dad has risen from (I make it about) 4% in mid-2010 to about 52% today, a 13-fold increase. Meanwhile, the average amount of help has risen from perhaps $25,000 to $83,397, a 3.3-fold increase.
A 3.3-fold increase on top of a 13-fold increase? That suggests a roughly 43-fold increase in the amount of money being lent by parents to their first home purchasing kids. That’s an awful big change in just 6 years.
Of course, there are shifts in First Time Buyer participation rate. Changes to the number and size of annual transactions make that calculation somewhat inaccurate. But these things are not THAT volatile.
A 43x increase in the amount of lending by the Bank of Mum and Dad to help their kids get into complete hock with the bank? It doesn’t pass the sniff test.
I don’t have access to the survey or enough data to add this one to my Statistical Buggery series. But there’s very likely either a mistake in my understanding of what the chart suggests, or a giant hole in the compilation methodology. Either way, I won’t retweet it for now.
Gareth,
I think that the graph may be closer to the truth that you give it credit for.
I’d guess that most first time home buyers are about 30. Their parents are 55+. For the parents these are typically the peak earning years and strong capacity to save having finished paying off their mortgages and being empty nesters. So, significant portion of the parents will have the capacity to provide this type of assistance.
I posit that in the context of an extended family this type of help makes perfect and effective investment.
Financially, it is perceived to be safe, it provides substitution for rent and pacifies the FOMO feeling. It has no legislative risk as opposed to superannuation and it carries no difficult to quantify market risk.
Apart from financial aspects, it sets the young people firmly in a stable family life. For their parents this is worth any money. This aspect should not be underestimated.
In summary, the funds are there, as they can be shifed from other types of expenditure or investment. There are also strong financial and non-financial incentives and mechanisms that make this help an enticing proposition.
The question remains why such a large acceleration of this type of help in the past few years. My view on this is that the driver is the size of the deposit on a house required to be able to obtain cheaper loan and not to pay mortgage insurance. This is now in the order of $200,000 (20%) in Sydney and not much less in Melbourne. It takes years for young people to save that much as this is limited by their earnings. A loan/gift from family can get them into the market sooner at the same time saving on rent and securing likely capital gain in the meantime. On the other hand, the mortgage rates are low, so repayments of a loan are relatively not that dififcult. Thus, in summary, the relationship between the deposit and mortgage repayments has changed. Deposit is relatively more painful to accumulate and mortgage repayments are less painful to carry.
Personally, being a baby boomer generation parent, I went through this help exercise a few years ago. I think that this was one of the best investments I ever made for all the reasons stated above.
Thanks Chris. I have no doubt much intra-family lending goes on, and much of it to good effect. It’s the magnitude of change 2010-2016 that I find hard to swallow. You’ve identified some important shifts in that period and it’s very likely that the total amount lent per annum has gone up quite significantly, but I find 43x unlikely. Not impossible, but unlikely. That doesn’t mean the 2016 figures aren’t representative of reality, perhaps the 2010 numbers are questionable. But it does make me question the usefulness of the survey results.
The current average age for first home buyers is 37.7 nationally. http://www.domain.com.au/news/how-old-is-too-old-to-get-on-the-property-ladder-20160926-groabg/
In my opinion, it doesn’t matter where you live in the world, buying a home within your budget is one of the most important things in life. This is was Buffett’s major priority / investment after getting married. He also realised the importance of home ownership via Berkshire’s acquisition of Clayton Homes.
We have one of the highest income tax rates in the world – up to 49% for every dollar earned > $180K. Current lending policies and tax laws (via gearing) favours property over other investments such as shares. For example, a Bank would rather accept the rental income from an investment property in Mount Druitt but would NOT accept the dividend income from a portfolio of Dividend Aristocrats (until after 2 yrs of ownership).
Gareth’s views on an Australian property bubble might be true for those living in places like Karratha (postcode 6714 has seen property values drop by -65% over the past 4 yrs.) But I’m not sure if taking a broad brush view of the Australian property market is correct. I prefer metrics like property valuation vs GDP per capital of other major capital cities like Hong Kong, Singapore, Toronto, New York, Chicago, London etc.
In addition to the above comments, our low interest rate is a major factor in driving up property prices coupled with low unemployment. A major correction (to blue-chip / inner city properties in our major capital cities is unlikely to happen anytime soon unless we have another Black Swan event (eg. GFC, high unemployment, recession / depression, 18% plus interest rates like the era of late 80s / early 90s…).
Our parents helped us (my wife and I) get into the property market over 15 yrs ago. They didn’t do much as there was no gifting of money involved. They used the equity in their home towards our 20% deposit and we paid all the interest and capital repayments.
This happened during an era where we had the First Home Owners Grant (both new and old properties) and received a waiver on property Stamp Duty. So, I’m not surprised by your stats.
Not too sure about the statistical ‘mathematics’ of your 4300% nor of those who composed the graph Gareth. Will leave that to the more actuarially inclined. But just a common sense family ‘sniff’ test would suggest it rings true if the sample was just from Sydney or Melbourne.
Baby boomers can see that passing on their wealth via a family home for their children makes a lot of financial planning sense and I would think property has been one of the mainstays of ‘secure’ family wealth generation over the past 30 years for most.
DeSoto’s book on the Mystery of Capital may not be on everyone’s reading list but the truth he expresses that tangible assets (property in particular) provide the key to growing wealth (capital). In other words try to get a loan from a bank without the security of a property is the heart of the question.
Parents see this very clearly for their children.
Hence why they pass on their inheritance by giving them a leg up into property I suggest?
Thanks Brett,
See my response above to Chris for more detail. It’s not the magnitude of lending today that I find unbelievable (it seems plausible) but the change 2010-2016. Perhaps the 2010 numbers are off? It’s not as if getting on the property ladder was particularly easy 6 years ago, and some not-insignificant markets in Australia (Perth, Darwin) have gotten cheaper since then.
Re the 4,300% change, it is a rough estimate. I don’t know the precise figure, but let’s say there are 80,000 FTB purchases annually in Australia (it should be in the ballpark). That will swing from year to year but let’s assume it static to make life easier (the changes won’t be that important to the end result). The chart appears to suggest in 2010, 4% of that 80,000 (being 3,200 borrowers) got help from Mum and Dad, and the average loan size appears to have been around $25,000. So Bank of Mum and Dad lent $80m that year (to me, that sounds way too low).
Fast forward to 2016, it looks like 52% of the 80,000 took out loans (41,600 loans) averaging $83,397 in size, for a grand total of $3.5bn (that sounds more plausible). $3.5bn is approximately 43 times the size of $80m. I’m pretty sure at least one of those numbers is quite wrong.
Its not a ‘lending spree’, its baby boomer Mums and Dads being responsible in helping their children buy their first home. They are sharing the gains from the increase in house prices they have ‘enjoyed’ with their children. We went to many auctions for new apartments with our son but were outnumbered 9 to 1 by foreign buyers. We could only buy an older apartment where the foreign buyers were excluded. The agent admitted the price would have been $100,000 more if foreign buyers could bid. We have gifted a third of the price of the unit. The often quoted notion that baby boomers are selfish getting all the benefits at the expense of the current young generation is an unfair generalisation, many are trying to help their children.
You’ll get no argument from me, Brian. For what it’s worth, I’m questioning the accuracy of survey results rather than passing judgement on generous parents’ kindness.
Although I will add that at a societal level, it’s not a pretty state of affairs. Because some parents have lots of money, and some have little. Some parents have 1 child, others have 6. Some parents and kids have good relations, others strained. A less unaffordable housing market would be more equitable.
Your comment does surprise me Gareth.
Differences between families are a fact of life, and I think linking that to housing affordability and societal equity seems a bit of a stretch.
Sure, a ‘less unaffordable housing market’, is perhaps a good thing but to say it is more ‘equitable’ touches on some pretty fundamental assumptions about the ways of the world. This was (I would suggest) one of the faulty premises underlying the sub-prime approach to housing in the USA.
I think Hayek touches on some of these matters in his book The Road to Serfdom. And history proved him to be right.
I’m short housing, with three siblings. Anything I say on the matter is tainted 🙂
But we have various levels of government, and a financial system, all seemingly cheering for higher house prices. Nobody in power is interested in taking away the punch bowl. It’s accentuated some pretty significant inter-generational wealth disparities that could come back to bite one day, not to mention the usual caveats about pain from any unwinding of overpriced assets. I’m proposing that a family on an average wage should be able to afford an average house in a starter suburb in their city of birth, without a booster loan from Mum and Dad. It’s hardly Marxism. But, as I said, I’m tainted.
Ave wage in Australia currently $75K.
Most families possibly earning nearer $100K with 2 working.
Can buy nice home in all capitals for under $400k (Melb perhaps a little over and Sydney nearer $500k). May need to move out a bit, and not expect inner city living but hey lets be realistic.
Mortgage for 25 years at 5% on $450K is $2631/mth
Same on $350K is $2046/mth
Depending upon individual circumstances and choices it hovers around 30% of income which I would have thought has been pretty normal (even for our parents when starting out).
Not easy but not beyond the reach of the average person.
Then there always are the options of moving to provincial locations or cheaper cities where the equation becomes a bit easier.
We’ve gotten a bit off topic (how wrong is that chart?), here are my last thoughts for now, I welcome any reply.
I think if we’re going to look at median household earnings ($84k in Sydney, I read), it deserves to be compared with median dwelling price.
I’ll use Sydney as an example as I know it better, but much the same applies to Melbourne and potentially elsewhere. Households in the east and north and coastal south are going to average a lot better than $84k/year. That means those in the west will typically be lower. Many, if not most, young families trying to buy an extremely modest 3-bedroom house ($500k) or apartment ($450k) in St Mary’s are likely to earn below average wage, often quite a bit lower. Those properties they aspire to own someday have approximately doubled in price the past 4-5 years, as have the deposits required. It’s made the prospect a significant stretch. For mine, there’s a failing somewhere if only an average earner and above can afford a modest starter property in a working-class suburb almost 50kms from the CBD.
Hi Gareth. I just had to respond to that one even if off topic, but it seems others have provided possible solutions to the original article.
On average house prices in Sydney have increased 48% in last 5 years, not doubled. But either way its still a significant passive wealth increase whichever figure you take.
It would be nice if folk on lower than average salaries could buy closer to the city but lets be realistic, the market prices are what they are whether its Chinese investors or SMSF investors or just plain home buyers etc. To state the obvious from Econ 101, it’s prime property which is fixed in size with a growing population – hence the people move to the south west, the Central Coast and further afield for Sydney.
Where I grew up (country NSW) the community established Starr-Bowkett society (a bit of a forerunner to Bldg Societies) to proactively assist below average wage earners buy a home. There is probably still some room for some creative community based ways to assist folk buy a home when they have less capital etc., but to expect that in prime city areas (within 20 to 40 km radius for starters) is plain unrealistic.
Possibly the last point is that the market absolutes of size of loan, level of income and repayment period are hard to avoid hence why I think gov’t involvement such as occurred in the USA with the sub-prime with Freddie Mac and Fannie Mae (despite all the good intentions) usually courts a mess. As ‘unfair’ and inequitable’ as the market may seem at times, it is preferable to gov’t social initiatives (I suggest). And I appreciate you have not suggested that.
Some valid points Brett. But I will just point out that averages don’t really matter to a young family out west. Mt Druitt (45kms from CBD) and similar suburbs are up closer to double over the past 5-6 years, they’ve significantly outperformed Sydney averages in this last leg up.
Oh and I agree with you 100%, last thing I’d want is government involvement. First Home buyers grants and the like have been a substantial part of the problem. There is one place I would request their help. If governments are going to insist on extremely high population growth for the country, then they also must ensure similarly high infrastructure spend and also try to minimise red tape on housing development (NSW in particular was actively strangling property development until fairly recently). Otherwise they’re playing a ponzi game to juice their own stats. I’ll stop here. I think we agree on plenty. All the best, thanks for the joust.
I’m with you Gareth, something doesn’t seem right. I think something must have been added to the calculation. Perhaps acting as a guarantor have been added, as that impacts the parents financially too as it’s another way of helping kids into the market.
Gareth, looking at the second graph in the report I think it explains why there has been such a big change over the last 5 years. The proportion of loans being supported by a parental guarantee has decreased by a similar magnitude to the gifts from parents increasing. It looks like it is more a switch from an equity support to cash gift.
What I find more alarming that we have gone from almost no parental support making repayments up to 15-20% over the period. As someone who works in this sector it raise red flags for me around responsible lending.
Good point Brendan. I missed that drop off on guarantees from 35% to 20% over the same period. Should explain some of the difference. It seems a big change just from the everyday decisions of the masses , I wonder if there’s a regulatory/whisper from APRA behind that? Thanks for your input
Gareth, good work as judicator to keep debate on task…
with 3 gen-Y boys moving into the property market…
regards deposit funding, there is a distinct difference between equity support and gifting declarations and personal guarantor for all parties concerned – the nuances in consideration of these variables may well be impacting confirmation of bias thinking or otherwise…
Off a low base, such a big percentage increase is not at all implausible. Indeed, the real mystery has been how and why house prices have continued to surge to the extent they have given that official household debt levels – while still rising – have not been going similarly parabolic.
What may have changed? (1) In the post GFC era banks may have tightened their lending standards and required higher downpayments; (2) as house prices have become ever more expensive, ‘getting on the housing ladder’ has become more difficult for Gen Ys; and (3) FOMO has accelerated as house prices have keep surging away to the upside.
May I submit that while a critical/skeptical eye is indeed needed, in the absence of better & more statistics, it is difficult to merely dismiss this out of hand.
mark, your comment dated 28 September above – “They didn’t do much as there was no gifting of money involved.”
they your parents, 1. provided an unsecured loan unobtainable elsewhere, and 2. more so preparedness to for-go own opportunities with money lent…
two gifts with very indirect but measurable cost and benefit…
M-D Morgan,
Yes, I agree with your 2 points as it may be applicable to many parents out there. The words “they didn’t do much” was a bit too loosely worded and comes across as ungrateful. However, I didn’t want to write a full on essay about it.
To be specific, the loan (whereby I paid all the interest and capital repayments) from my parents was about $10K 16 years ago. They owned 4 properties in Sydney unencumbered (and still do), so it had negligible impact on them to provide me this short to medium term loan.
In a world whereby many middle class to upper class parents pay for their children’s private school fees, private tuition classes, tertiary school fees, GAP year, weddings etc. (something that I did not benefit from), I felt that my parents did not have to do much and were not inconvenienced – relative to what other middle class parents were doing for their kids. Had they gifted the full amount of my 20% deposit, then that would be a different story.
I know a middle class couple in their mid 50’s who have done all this and more for their two daughters. Private schools, ballet and piano lessons, overseas holidays, regular eating out, a second hand car on their 18th birthday.
The result is two kids that don’t know how to save and parents who’s mortgage has doubled in the past eighteen years. But they are not worried, their house has tripled in value in that time.
They are now talking about sub-dividing their land to build two units for their daughters.
Face it folks we are killing our kids with kindness.
l do
There is an argument that the less help the kids get, the better they’ll do. Thomas Stanley and William Danko, authors of The Millionaire Next Door, found that ongoing financial support to adult children encourages spending rather than saving and investing.
Their most provocative finding was that the lion’s share of US millionaires were the first generation to achieve affluence.
More than 80 per cent received no inheritance, fewer than a fifth attended private schools.
Don’t give your kids a deposit; give them a book on how to save, invest and live within within their means.
Hey Peter, I agree with your sentiment (and book recommendation – great read) but I also believe there is scope for assistance as well. My wife and I have assisted our daughter to purchase a property – we own 40% paid in cash, daughter owns 60% paid via mortgage (tenants in common).
Our viewpoint is we will continue to assist her as long as she is doing the right things; the moment that stops the tap is turned off. She currently lives on $150 a week and puts the rest of her income into the mortgage. Admittedly, we are still assisting her with some expenses but I am confident that she is learning good money management skills through this experience. I do think that financial literacy starts at a young age and we have always discussed finance with her.