When the Bear inevitably comes, New Zealand’s economy will take a massive hit, and real estate values, based on blind and irrational exuberance, will crash down to long term average values, or worse. A large percentage of kiwis will be ‘under water’. Parents will be losing their homes as well as the kids. Our record levels of household debt will be our undoing, and the catalyst for a serious and prolonged economic depression. Hans Hilhorst
Up to 90% of first-home buyers relying on parents
The gap between the property haves and have-nots looks set to widen as a growing number of first-home buyers turn to their parents to get help jumping on the property ladder.
Figures from Australia show over 55 per cent of first home buyers received some help from their parents last year up from just 3.3 per cent in 2010.
There is no across industry data on what percentage of first home buyers need parental help but figures from Mike Pero Mortgages show it is likely to be higher in New Zealand.
Mark Collins, chief executive at Mike Pero Mortgages, said 60 to 70 per cent of first home buyers had parental help and for those under 30, the proportion jumped to 80 to 90 per cent. The difference for those under 30 is probably linked to having less in their KiwiSaver accounts to draw out. “If you are in your mid 30s to 40s you have probably been earning at higher rate.”
Collins said he had been surprised by the figures although he pointed out that it was mainly Auckland where parental support was so high in the regions it was more like 20 per cent of first home buyers. “Getting a 20 per cent deposit together in Timaru is not as hard.” Most parental loans are on a “pay it back when you can” basis which could cause complications if the parent’s situation changed and they need the money back quickly. “It means there is almost four people in the deal.” Collins urged people to get advice and put a legal agreement in place for the loan.
John Bolton, chief executive at mortgage broker Squirrel, said the number of first-home buyers who were helped by their parents to get on the property ladder was “pretty significant”.
“The majority would have some sort of parental support. Parents typically help out either through a cash contribution or through providing a limited guarantee over their home, which is more common. Often it is not really a gift, it is a loan which is interest free, which they pay back when they can. The situation has changed dramatically from 10 years ago. Back to 2008 first-home buyers were able to borrow 100 per cent. You didn’t even need a deposit. Then the global financial crisis hit and lending was tightened up and most buyers now need a 20 per cent deposit.”
Karen Tatterson, an Auckland mortgage broker with Loan Market, said the number of first-home buyers using parental help had doubled in the last 10 years and rising property prices was the driving factor. Tatterson who has already planned to help her own son get on the property ladder, said it is a common thread of discussion among her and her friends how they were going to be able to help their children out.
But it is a challenge made tougher for those with more than one child. Typically parents who helped out used the equity in their property to boost the deposit over the 80 per cent threshold so the children did not have to pay a low equity fee.
In Australia, the average value of the help provider by parents was A$80k, and Tatterson said here it was around $50k to $80k in New Zealand.
But the situation has fueled concerns that only property owning families will be able to help their offspring locking renters and their children out.
Economist Shamubeel Eaqub said the divide between the property haves and have-not had been happening for a while. He pointed to the last census in 2013 which showed just over half of adults were renting and home ownership levels were falling across all age-groups.
“This divide is going to multiply. Only those people with parents with property are able to access it because they are trading in the same pool.”
Eaqub said 30 to 40 years ago people didn’t need help from their parents because they could save a deposit from their own income. But that is no longer so easy.
Last week, the Real Estate Institute revealed it takes Aucklanders on an average weekly income 16 years of hard slog to save for a house.
Eaqub said homeownership rates had peaked in the early 90s and the children of those who had struggled to get on the property ladder were now coming through.
“The consequence of that is going to be more apparent.” But he said there was no quick fix for this kind of generational shift. “I’m not confident we can turn around homeownership rates anytime soon. It has taken around 30 years of pro homeownership policy to build up rates in New Zealand and he was not convinced the political environment was open to the kind of policies needed to change it significantly.
Diane Maxwell, Retirement Commissioner, said it was seeing more and more older New Zealanders trying to help their adult children into a home. “It can be a good thing but it does depend on the finances of parents and how much strain it puts on their own situation. “We’ve seen situations where people have sold their family home and moved out of the city to free up money for kids. That may lead to greater isolation as they move away from their community and friends. Maxwell said there was also a risk that parents would loan or give money to their children that they would need later in life.
“We have worked on a case where a retiree lost his entire life savings sending money to an inheritance scam his key motivation was that with the inheritance windfall he would be able to buy houses for his children. It is not a good thing if the financial situation and home ownership status of the parents had a greater impact on the child than their own prospects in life.
Bank of Mum and Dad can take a Hit
Helping your children buy their first home can come back to bite.
Lending money for a deposit or guaranteeing their loan can break families apart and lead to parental bankruptcy unless everyone goes in with their eyes open.
The risks of gifts
Gifting the deposit is one of the ways parents help. Lending the money, however, may be safer. Parents often don’t think of the consequences of their action. What happens, for example:
If your child splits from his or her partner? Half of your gift might go to the now less than favourable former partner.
If your child develops an expectation you’ll shell out money whenever they want it?
If the other children become bitter and twisted that their sibling got more than they did?
With your Will? Do you take this money into account when divvying up your wealth?
Some parents borrow themselves in order to fund a deposit for the children. Banks are wary of this and may not lend if they see the child didn’t save the deposit money themselves.
If the child subsequently loses the home, the parents are still stuck paying the loan they took out.
More than a piece of paper
If you don’t have cash to lend to the children, but still want to help, another option is to go guarantor. That means you guarantee that if the child can’t repay the loan, you will.
Banking Ombudsman Nicola Sladden says parents don’t always understand the implications of this. it’s much more than a piece of paper that you’ve signed.
“Parents are frequently unaware of how a guarantee works in practice. The amount of a guarantee is often unlimited. Even if it is limited to the amount of the loan, it is often a guarantee of all the customer’s borrowing up to that limit, not simply of the original home loan.”
This means parents are accepting legal liability for other debts incurred in their name, irrespective of whether those debts were incurred before or after they provided the guarantee.
That’s a very good reason to get legal advice and use a mortgage broker who may be able to negotiate a more limited guarantee.
Many a parent has been caught by their kids behaving badly.
“It is natural for parents to assume that they know their child’s credit history, their likelihood of making repayments and whether they will be clear and transparent about the borrowing. But this is not always the case. It can lead to severe relationship breakdowns if a guarantor is actually called upon to pay the loan. The fact a bank requires a guarantor means that the borrower did not meet the bank’s lending criteria or that the borrower may default on the loan.”
Impossible to cancel
When parents realise the extent of what they’ve signed up for, they sometimes try to cancel the guarantee. It’s not so easy and does not absolve the guarantor of all responsibility.” says Sladden. “They will still be liable for debt incurred right up to that point in time. If a parent does cancel a guarantee, the child may then struggle to continue borrowing finance from the bank.”
Another fish-hook in the three-way guarantor relationship between parent, child and the bank is that, when things go wrong, there is no obligation for the bank to pursue the child for the debt first. The bank can just go straight to the guarantor for money.
If the parents can’t come up with cash to pay, the bank can force the sale of their home if it’s easier to sell than the child’s.
If a guarantor has an account at the same bank as the borrower,” says Sladden, “the bank may take funds from the guarantor’s account to cover the debt.”