(Bloomberg) -- Britain’s wealthy parents typically give their children £25,000 to to buy a property, making those young adults more than twice as likely to grab a rung on the housing ladder.
The findings from the Institute for Fiscal Studies underlines wealth inequalities that’s left those from more modest backgrounds finding it more difficult to own a home. It’s one of the key issues rising up the political agenda ahead of the next election.
The IFS found that more than half of the first-time home buyers in their 20s received money from their parents for a deposit. Those transfers help young people buy a house sooner than peers who don’t have parental assistance. They also secure lower mortgage interest payments by putting down a larger deposit.
“The Bank of Mum and Dad has played an important role in helping those with richer parents move onto the housing ladder at the same time that increasing prices have pushed this further out of reach for those without family help,” Bee Boileau, a research economist at the IFS, said in a report Friday.
Britain’s property market has held up better than expected in the face of soaring interest rates. That’s due in part to a shortage of places up for sale but also on the resilience of households, especially wealthy ones, in the face of a cost-of-living crisis.
The Bank of England this week said households in aggregate are in better shape to cope with a surge in interest rates than in the middle of the year, with only about 440,000 likely to experience debt distress. Overall, the household debt to income ratio was 139% in 2023, the lowest level since 2002. That reflects rising real incomes and efforts by households to reduce their debt.
Homeownership rates for 25 to 39 year-olds have been declining since 2009, the IFS said. That drop has been steeper for those coming from less wealthy backgrounds. Ownership rates for children of homeowners fell to 51% in 2019, from 60% in 2009. For those who were raised in rented accommodation, the homeownership rate almost halved to 22% over the same period.
Family transfers are driving up those inequalities. First-time buyers with university-educated, homeowning parents received an average of £35,000 from their family, three times more than those whose parents were renters. Children of homeowners were also more likely to receive any financial help in the first place.
More generous transfers from wealthy parents tend to go towards a larger deposit rather than a more expensive home. That gives first-time homebuyers a leg up by reducing future interest payments. For example, those receiving a transfer of £25,000 and putting down a deposit of 25% instead of 10% of the house price, save £8,500 on the repayments on a typical five-year fixed rate mortgage taken out in 2018, according to the IFS.
“This can have large knock-on effects for wealth accumulation,” Boileau said. “It reduces the interest rate paid on the whole mortgage they take out, widening wealth differences between those who receive more and those who receive less.”
Financial help matters more for those with relatively low saving levels, which limit the properties they can buy. For two thirds of first-time homebuyers, each £1,000 received from parents increases the value of the house they can buy by £10,000, assuming a 10% deposit, the report found.
--With assistance from Andrew Atkinson.
©2023 Bloomberg L.P.