The NZ Initiative's Richard Baker says the Bank of Mum & Dad is a transfer of wealth to the young, leaving the parents with new debt and expense, and highlighting all that's wrong with our housing market

The NZ Initiative's Richard Baker says the Bank of Mum & Dad is a transfer of wealth to the young, leaving the parents with new debt and expense, and highlighting all that's wrong with our housing market

By Richard Baker*

There is an old saying that when you are in a battle with yourself and you win, you still lose. Perhaps the same thing can be said of our housing shortage.

The winners in the housing market are supposedly the Baby Boomers and Gen Xers. They alone can afford to buy and invest in property. The losers are the Millennials (Gen Y and younger). Apparently, they are doomed to a life of renting.

While it is tempting to dilute complex issues with pat diagnoses, in this case, the temptation is best resisted. Could it be that we are all losers in our current housing woes?

Evidence for this statement came from various mortgage brokers earlier this month. It suggests that 60 to 70% of first home buyers receive assistance from their parents to get into the property market. These figures rise to 80 to 90% of buyers under the age of 30.

These high rates are most pronounced in Auckland. While they level off as one moves into the provinces, they still hover at a rate of one in five withdrawing funds from the Bank of Mum and Dad.

This would challenge the notion of a property-owning rentier class eating lotuses and sipping Cristal while their descendants suffer in landless penury. 

On the contrary, notwithstanding the demands of funding retirement in times of increased life expectancy, Baby Boomers and Gen Xers are having to borrow and create claims against their assets to fund their children and grandchildren.

To the critics who might say “But they can afford it” let’s point out that we do not have some new wealthy, landed, residential property-owning class. A nation does not create wealth by its citizens selling homes to each other. So too individuals cannot spend a residential home. One may feel wealthier with a high property valuation, but no cash accrues until sold. If one sells and buys in the same market then, scaling and regional relocation aside, nothing is achieved.

Borrowing in this scenario is net new debt and expense, and non-deductible at that.

Of course, value can be captured by selling in an expensive market and buying in a cheaper (i.e. regional) market. But here too that value accrues not to the Boomers or GenXers as such, but to their offspring.

There is little evidence that intergenerational love and affection has somehow ceased.  Rather, Boomers and GenXers continue to help their descendants through wills, interest-free and on-demand loans, gifts, guarantees, co-signings, and remortgages.  

Home ownership is widely spread, historically founded and deeply entrenched in New Zealand. The 2013 census data shows 50% of dwellings are owned or partly owned and 15% are held in a family trust. This leaves just over a third (35%) not owned or in a trust. This provides an ample capital base for a lot of recirculation of credit to occur if the 80 to 90% figures of parental support are correct.

The housing shortage has been born from a long gestation of various factors; rural/urban boundaries and underlying cultural attitudes, density and height limits, poor planning, inefficient funding,  skewed taxation, increased immigration post GFC, flawed investment and building incentives, non-scalable construction models and resources, and regulatory processes that delay and defer rather than facilitate and expedite.

Such a lengthy conflation of factors requires an equally long and steady correction. Our housing market is a lose-lose situation for everyone. Only genuine reform can make it a win-win across generations.


*Richard Baker is research director at The New Zealand Initiative.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

48 Comments

Comment Filter

Highlight new comments in the last hr(s).

Interesting that in the UK that 90% are reliant on bank of mum and dad in buying their first home against around 20% here. Hardly an ideal state of play I know but I would suggest that role of bank of mum and dad in NZ is going to rise from current levels.

So the best way to help your kids is to assist them into the same ponzi scheme you bought into.

It cannot be described as a ponzi scheme if yields are similar or better than a bank deposit. Also yields from property are coming from hard working renters as a stream of income and not from the money put in by new investors.

It can be described at a ponzi scheme as the increasing debt burden that is backing the inflated asset prices can only be maintained through continually lowering interest rates. Hopefully we can increase working for families subsidies so hard working families can pay ever increasing rent so speculators can go into ever increasing debt. Keep the party alive New Zealand.

I've never lived inside a "ponzi scheme" before

It also qualifies as a ponzi as the only way to keep it going is to keep introducing new people at the bottom to pay the ever inflating prices. Since our birth rates are so low we have to do it with immigration, why do you think Labour are now balking at the idea of turning the tap off? Much easier to talk about it in opposition that actually do something that might affect the beloved ponzi.

What is the alternative if we want our children to have homes?

I think we just have to get over it. They will be a generation of renters who hopefully excel in investing in the productive sector.
Unfortunately I think its too late, a much larger % of this countries land is owned by offshore interests than any govt would ever admit to, and it wont get any better in the near future.
The NZ rite off passage is over...

I would doubt that there is any alternative to making housing less attractive as an investment or vehicle for storing or laundering money. This, and we need to stop borrowing from the future in the form of QE - which has not achieved what it was nominally meant to and has only blown bubbles.

There is nothing at all wrong with parents helping their children buy their first home if they have equity in their own home.
The main thing though is to,ensure that they purchase a property that has a bit of upside
We have helped 2 of our children into property so far due to their age having to be over 18, and both have now got extremely good equity in them
that they wouldn’t have had if their parents didn’t assist.
Eventually children will inherit everything anyway, so why wouldn’t parents help their children?
I have heard of parents not being prepared to help their kids out because their parents hadn’t helped them!!
What a selfish attitude in this day and age!
Thing is that we have worked and invested to enable our children to be financially secure early in life and that they are now!

Things were probably better in the old days for the common people when the young were turfed out of the house at eighteen and forced to fend for themselves and largely did okay. Unfortunately times change, the future will never be the same as the past, and we now have a new paradigm. Many cultures in our society today are focused on helping their children succeed and actually this was always a focus of the well-to-do traditional Kiwis as well.

14
up

The NZ Initiative, one of the main proponents of our breakneck immigration rate, now discussing unaffordable housing. Ironic.

13
up

This could probably have been better summed up by saying:

“Parents gain fake money from appreciating house prices, parents spend real money helping out children get into lots of debt. Parents are poorer, children are poorer - John Key’s brighter future is here.”

Could also be summed up by saying
''some parents get out there and work hard to put themselves in a position to help their children.Its not all about property investment sometimes its just hard yakka.'

Just to be clear, I don’t judge parents who financially help their children. What bothers me is parents who are desperate to help their children being forced to take on debt or equity risk. This creates huge risk for two generations of a family and only adds fuel to the fire that is the housing market.

...hardly

Hardly, children not in lots of debt at all!
Their debt level is far less to service than paying rent
It is all about intelligent buying!

Can we take it your children live in Dunedin or The Lakes!

First of all rent is not debt, it’s rent. If your mortgage payments are less than your rent, you still have risks associated with the debt.

Second, anecdote is not data. In your particular instance parental assistance may not have resulted in more debt being taken on, but I bet most situations of parental assistance result in a larger mortgage as the parental guarantee or deposit support allows more to be borrowed than otherwise would be.

Hardly, yes it is more debt that is owed but you don’t have to stump up with any deposit.
Buying under market value gives you equity, and with this you are able to leverage to buy property which is positively geared.

"Buying under market value" - how do you argue with this guy?

How can his children be buying under value when the Christchurch housing market steadily but surely drops and that is before inflation is taken into account. He would have been better encouraging them to buy in Dunedin.

Perhaps dependence on inherited wealth will help to entrench hereditary classes too. Welcome back to the middle ages?

Yep, back to feudal era stuff.

Yep. They had serfs to do the unpleasant jobs and we have low paid immigrants (generally praised as irreplaceable care-givers) but in the middle ages serf was a hereditary job

"Our housing market is a lose-lose situation for everyone."
No it's not, I know at least 1 family for whom this Statement is untrue

Isn't getting poorer the logical outcome of spending more than we earn for 50 odd years? That is running a current account deficit by importing foreign capital to buy our assets off us.

Maybe the baby boomers need to work a bit longer to help their grandchildren get on the housing ladder? I see the only way I can influence things on a wealth redistribution basis is from an inter family perspective. I am already saving for my children who are 15 years away from buying a house.

Don’t expect politicians to fix anything or else you will be moaning on here for evermore!

One of the problems here is that the old farts are likely to believe that there is a high likelihood that the future will reflect the past with respect to house prices. Their rationale for this projection is based on their experience. They're likely to know much less about "lending money into existence" as practiced by the retail banks. And even if they do know, they're guaranteed to know even less about the implications.

They're potentially selling their offspring down the river despite their good intentions.

I can't see the problem with parents helping their kids acquire a house. I bought a house for my daughter the year she was born, the house is rented out now, pays for itself, my daughter who's 12 now will get the house when she's 21. Why is that a bad thing?

It’s a question of means and circumstances. If you are in a position to help then why not, but there are ways to help that can have significant costs.

Consider a scenario where a couple has a $150,000 deposit, enough to borrow $750,000. But they want to borrow $1,000,000, so they get another $50,000 from the bank of mum and dad who borrow it against their house. Mum and Dad have no means to pay it back and are reliant on their children making payments.

The daughter who is the primary income earner loses her job in a recession. They can’t meet the mortgage payments on a $800k loan on one income (but they could have made them on a $600k loan. They have to sell the house but the price has dropped 20%. They lose their entire deposit including the parents $50,000. They have no house and they need to slowly pay off the $50,000 their parents borrowed.

Sounds fanciful. Recessions happen, people lose their jobs, the more debt you have the more risk you have. People take too much delight these days in being lucky enough to borrow horrendous amounts of money. It is a not a prize to get extra debt it is a curse.

Hardly, you are clearly talking about a scenario that shouldn’t be.

If a couple has 150k deposit then they should be looking to buy a property around 500k max and borrow 350k max.

Anything over this and you would be putting yourself in some financial difficulty if circumstances change.

350k at say 4.5% is only 300 per week interest only so far less than renting, it isn’t rocket science this housing business.

Well on the need for prudence we can agree.

But many people use parental assistance to borrow more money than they otherwise could, increasing the risk to them and their parents.

I’m fine with the principle of helping, but I’m worried about ‘helping’ people into more debt.

Hardly, in the scenario you're describing the family gets in trouble because they have over-commited (borrowed too much) not because the parents are helping financially.

True, my point is the family assistance must often be facilitating more debt.

If families are giving say $300,000 to substitute for debt I’m less worried about that.

So three scenarios:

• a couple are planning on buying a house for $600,000 with a $120,000 deposit. Their parents give them $80,000 to boost their equity. - I have absolutely no problem with this.

• a couple want to buy a house but only have $40,000 of the $120,000 deposit. Their parents help them out by borrowing $80,000 to top up their deposit. - this one is a bit worrying.

• a couple want to buy a house an have $60,000 deposit. The bank will lend them $600,000 if they get another $60,000. The house they want is $1.2M. The parents guarantee their mortgage against their home. The couple can make the mortgage payments but only if interest rates stay below 6%. - this scenario is terrifying, I believe there is a lot of this going on.

Good points Hardly.
I cannot see why the kids need a $1.2 million house (even in Auckland), it's a first house, a shoe-in into house ownership. A smaller, older house in a not perfect suburb will do. Then it's up to them to climb the property Ladder.
FYI the house I bought for my daughter was $250k (worth around 400k today).

Also why not help my child get a house, I don't want a coffin made out of gold, I'd rather provide for my offspring and teach them to also look after their kids

The reality is that most students when they leave school whether it be High a School,or a University are financially illiterate.
They should be taught by either their teachers or parents about how to cope in the big wide world.
Most just go to work and blow most if not all of their money on consummables that won’t get them anywhere.
If you aren’t taught or want to learn then you will probably battle financially for most of your life financially.
There are many ways of getting your first home!

Most just go to work and blow most if not all of their money on consummables that won’t get them anywhere.

One big problem there. Without these people spending and "blowing their money", the NZ economy would be toast. 60% of GDP relies on consumer spending. The less they spend and the more they save, the more the deleterious the effect on the economy.

Unless of course you want a recession and watch the corresponding impact on house prices. Unfortunately in asset bubbles, the impacts are usually much worse.

Only invest money you can afford to lose.
Only give money to kids which you don't need paid back.

This article shows a potential "inequality of opportunity" issue. Do gift taxes need to be reinstated to fix this?

ARB! Why on earth do people on here want more and more taxes just because they won’t need to pay them?
Why should people be taxed for gifting money to someone?

Deloitte tax expert Bruce Wallace 5/3/2018:

"Capital gains taxes typically didn't collect a whole lot of tax, were complex to implement and for taxpayers.The traditional thinking has been the cost-benefit analysis is marginal."

The same applies to gift duty - which is mainly why it was scrapped in NZ. Those with resources will always find a way round schemes set up by governments to thieve wealth accumulated by individuals through deferred consumption, saving and prudent investment.

Because they are jealous. I'm sure ARB wouldn't propose a gift tax if HE was about to be given money

What we need is a big fat recession. If there are no jobs, then anyone who can leave the country, will leave the country, leaving the houses for the true patriots. Bring on brain drain 2.

Like many baby boomers I have helped my children get ahead in times which are very different to when I started working. First of all I made them both get loans when they went to university and they both knew that those loans were going to be their responsibility if they did not finish their degrees. They both did and I paid off both loans as the government at that time gave a 10 per cent discount if you paid back a $1. Both are woking hard and I have helped them both into their first homes. One in Wellington Central and the other in a provincial capital. Even though I could have I have not helped them completely with their home purchases. Both of them had to be working consistently and be in a position to pay back their loan. I do not see the sense in just giving them a home as that makes life a bit too easy at the outset. Anyone who gives their child a home when the child is not working is taking a bit of a risk in my opinion. That child might just get a bit too used to sitting on their chuff.

Thks for sharing gordon.. I pretty much agree with what u say..

And if we are lucky.... our kids will look out for us when we are too old and unable to look out for ourselves..

I'm guessing , your kids will be there for you..

Well said Gordon