Across the country, residential property prices have risen more than 350 percent in two decades, changing the fundamental structure of our national housing market and the way properties are bought and sold.
Where incomes have increased just 125 percent during the same 20 years, the ‘Bank of Mum and Dad’ has stepped in to become New Zealand’s fifth largest home lender, giving Kiwi kids a helping hand into their first homes.
Recent research from Consumer New Zealand has found Kiwi parents have contributed more than $22.6 billion in funds to assist children in purchasing their first property.
By comparison, ANZ Bank, which is New Zealand’s largest home lender, has just more than $71 billion in current lending to owner-occupiers.
In a statement of how vastly different the purchasing process is from decades past, historical research from Massey University found Kiwi parents gifted an average of $25,000 to children purchasing a home 10 years ago.
The recent research by Consumer New Zealand found this has risen four-fold to an average value of $108,000.
There are a variety of ways parents can help their children into a first home; gifting and loaning money for a deposit are popular avenues, while 25 percent of the parents surveyed by Consumer New Zealand chose to act as a guarantor.
Becoming a guarantor means parents can cover the entire value or a predetermined portion of the value of a property as if it was purchased together. The guarantee can be released once the child’s home rises sufficiently in value, or they pay enough principal balance to offer equity cover on the loan.
Bank commentators note institutional lenders usually prefer parents ‘gifting’ an amount that can be put towards the deposit on a home, rather than a loan, as it means the borrowers’ total liability can remain below a required loan to value ratio (LVR).
The research suggests a huge intergenerational wealth transfer is underway, with parents that may have previously gifted money or property only as an inheritance, now recognising an acute need to step in earlier and help their children to purchase their first home.
The report from Consumer New Zealand notes that 58 percent of those parents that used savings to provide a deposit did not expect these funds to be paid back, which has a ripple effect for the wider economy.
Anecdotal evidence suggests some retirement-age parents may end up staying in the workforce longer to recoup these costs, while others looked to cash in on the family home and downsize their main residential dwelling.
The latter, increasing interest in apartment and townhouse-style developments aimed at appealing to downsizers and the retiring population.
Parents are also increasingly using the family home or investment property as leverage to borrow their share of a deposit for their children. However, banks are becoming tougher on retirees without income.
In Australia, two bank heavyweights have recently joined together to launch a new bank, 2be, which specifically caters to 55–75-year-old parents wishing to borrow up to AUD$500,000 to fund a deposit for their children’s first home.
The flow of family funds has the potential to impact the economy in a variety of ways; the (usually interest-free) funding line can create greater demand for residential property, as buyers that may otherwise have been locked out of the market receive a hand up to pay higher prices.
The huge role of the Bank of Mum and Dad has also supported value growth in certain ‘first home buyer’ target areas while helping to encourage interest in the new-build sector.
Parents are also dipping into retirement savings to help with a deposit for their children’s home as research shows nearly a quarter choose to cut back on daily expenses to make their contributions possible.
National homeownership rates have been steadily falling for the last several decades with just 65 percent of Kiwis currently owning a home – the lowest rate in 70 years.
Research shows that young, working-age Kiwis are most impacted by this societal change, with homeownership amongst the 30-35-year-old age bracket dropping some 20 percent in the last 30 years.
A ferocious rise in property values over the last decade has contrasted against wages that fail to keep pace with inflation while the rising cost of everyday necessities like energy, food and petrol means it’s tougher for Kiwis to save enough for a first home deposit.
This has seen the Bank of Mum and Dad become a more valuable feature of the first home buying process.
However, it also results in a greater social divide between those who are fortunate to have a helping hand, and those that aren’t.
As inequality across Aotearoa grows, central and local governments are more mobilised to make changes that enable the creation of affordable housing at scale and pace. This is evidenced by the National Policy Statement on Urban Development’s (NPS-UD) Medium Density Residential Standards (MDRS) which come August will allow three homes of up to three storeys to be built on most residential sites without resource consent across our main cities.
The use of family funding to ease children into their first home is nothing new, however, the amount of funding required to keep pace with inflation has played a supportive role in keeping property prices up, while continuing to add demand for the new-build and development sector.