Housing prices in Australia are so high young people can’t get loans to buy them. Luckily for some, there’s the ‘Bank of Mum and Dad’.
An ATM welcomes a user to the bank of mum and dad. (Illustration by News Decoder)
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Australia is often referred to as ‘The Lucky Country’ due largely to its status as a continent of abundant natural wealth and resources enjoyed by a relatively small population.
For generations, it has given Australians a sense that they are living in a very egalitarian country where anyone, whether born here or recently arrived, could expect a reasonable standard of living and one day might own their own home if they worked hard enough.
But in recent years this has changed. Sydney, Australia’s largest city, is the world’s second most expensive property market, after Hong Kong, when property prices are compared with income.
A typical Sydney house costs the Australian equivalent of about $940,000 while apartment prices average about $530,000 according to figures released in November by real estate monitoring company PropTrack.
Surging property prices, slow growth in wages and increases in the cost of living have now forced many to the realisation they will never own a home. This is also a factor, according to some analysts, contributing to Australia’s current record low birthrate; many feel they simply can’t afford to start a family.
But there is one group of people for whom these pressures are not hitting as hard and who are likely to emerge as winners from the current situation. And that is the group which has access to what’s known locally as ‘the Bank of Mum and Dad’.
Housing for some
According to data from the Australian Bureau of Statistics, even outside the major cities, housing prices are a problem.
The mean price for an average home across the country has topped $910,000 in Australian dollars or U.S. $593,250.
The typical Australian home now costs eight times the median household income, while rents are also at a record high as a share of income.
People on a median income can take more than 10 years to save for a 20% deposit to buy a home and home loan repayments could then swallow up to half of household income.
In Australia, the government considers a household to be in housing stress if it pays more than 30% of income on housing costs.
Supply and demand are out of kilter and the cost is falling on younger generations.
Lack of supply, plenty of demand
The reasons for this housing crisis are numerous. There’s not enough houses being built — planning laws are too restrictive, density has not been increased enough and migration is too high.
Taxes and duties also favour current owners staying put rather than downsizing, and investment over ownership. Rents are easy to increase, and tenants can be easily evicted, while the government is not building enough public housing.
This has given rise to this important new lender: the Bank of Mum and Dad. Parents who have the financial means step in to provide the financial assistance their children need to enter the property market.
This can be in the form of gifts or loans to cover home deposits, mortgage payments or even the entire purchase price of a property.
With property prices rising so much and so fast across Australia, it is understandable that parents want to help their children get into the housing market.
But now this Bank of Mum and Dad has become so large as a home loan enabler that without it, it’s difficult for any young person to not only save for a deposit, but then go on to cover the cost of a mortgage, bills, food and childcare.
So big has this source of lending become, that the Productivity Commission, the Government’s independent research and advisory body, estimates if it was an actual bank, it would be one of the top 10 mortgage lenders in the nation.
That estimate is based on 2018 data, and anecdotal evidence suggests it’s an even bigger lender today.
A question of equity
While not all home loan help from parents is in the form of gifts, the Commission says the number of young people receiving intergenerational gifts for housing has doubled in the past 20 years.
That is having a dramatic effect on the broader society.
“It means Australia is less of an egalitarian meritocracy,” said Alan Kohler, an Australian financial journalist who has written extensively on the housing crisis.
For now, it offers one of the few pathways for younger buyers to easily access the housing market.
Those on average incomes, or not lucky enough to have parents with enough money to step in as willing lenders, are finding they are on course for a very different lifestyle from previous generations.
Questions to consider:
- What are the main reasons housing is becoming unaffordable for younger people?
- Why is the “Bank of Mum & Dad” not the best solution?
- Do you think home ownership is a privilege or a right? Why?
Richard Hubbard is a finance and economics journalist with more than 35 years reporting from Australia, the UK, Asia and the United States. He is currently a freelance journalist based in Sydney. Hubbard covered the Asian financial crisis of the late 1990s from Hong Kong and Singapore, and later the run-up to the 2008 financial crisis and its aftermath from London.
