Bank of mum and dad the driving force behind 40 per cent of first home buyers

The only way many first-home buyers can now hope to break into the housing market is with substantial financial help from their parents or grandparents, as they become even more crushed by interest rates, rising prices and borrowing limits.

The latest Domain First-Home Buyer Report shows that, even with Stage 3 tax cuts, young couples would take six years and seven months to save for a 20 per cent deposit on a house in Sydney and five years and four months in Melbourne. Their dwindling hopes often lie with their families.

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“Many are so far off their dream of buying their first home as it’s now so challenging,” says Dr Nicola Powell, Domain’s chief of research and economics. “As a result, we’re seeing an increasing reliance on the bank of mum and dad, or even the bank of grandparents, to help them, especially in the most expensive capital markets.

“We’re now seeing detailed home data that the loan-to-value ratio has shrunk, so it seems a big chunk of the first-home deposit is being supported by family members.”

That help might be via a cash gift towards the deposit or purchase price, assistance with mortgage repayments, an offer to be a guarantor for a loan, or even in-kind support, like allowing children to live at home for longer while they save.

In the 1980s, only around 15 per cent of first-home buyers received such support from their parents. Today, according to Australian Housing Monitor research, that’s leapt to a whopping 40 per cent. That’s meant kindly parents injected more than 2.7 billion into the property market, say Jarden economists, in the year to November 2023.

Good family relations have never been more valuable. A study from the Australian Housing and Urban Research Institute (AHURI) and University of Sydney, Transitions into Home Ownership: A Quantitative Assessment, found that a gift of $10,000 or more made a first home purchase an incredible 90 per cent more likely.

But does all that extra cash floating around distort the market and add to the inflationary pressures that the government is keen to minimise in order to lower interest rates?

It certainly distorts it in widening the gap between the children of parents who have money and those who don’t, says study lead Professor Stephen Whelan. “We found that well-heeled parents are likely to give much bigger assistance to their children to facilitate home ownership,” he said. “It ‘unlevels’ the playing field, so to speak.

“We’ve seen that assistance bring forward home ownership when they don’t have to spend years saving and can do it now instead. But it does feed into inequality over generations. We also found that if renters haven’t bought a home by their early 30s, then they’re less likely to become homeowners later in life and will really struggle later on.”

Most economists aren’t particularly worried that the overactivity at the bank of mum and dad will negatively impact the overall economy too much. Independent economist Saul Eslake believes it could cut both ways.

“With money from that bank, people are prepared to pay more for housing than they otherwise would have, and that, in theory, can affect prices and the Consumer Price Index if they’re buying new housing,” he said. Not so much if it’s established housing. But the impact will still be small.

“It depends too where Mum and Dad get their money from. They might be raiding their super or savings, which wouldn’t be detracting from demand for goods and services in the economy. But if they’re not spending as much to give money to the kids, that might lessen inflationary demand …”

PP Advisory principal Harley Dale agrees. Extra funds will give first-home buyers extra buying power, which could impact the market, but parents are reducing their own net wealth at the same time.

“I think it’s something the State and Federal governments are keeping an eye on, but it’s probably not a concerning consideration at this point in time, and I doubt the RBA [Reserve Bank of Australia] is looking at it any differently.”