Sourced from AFR 14/06/2018 Article by Duncan Hughes
Lending by the Bank of Mum and Dad has increased by 25 per cent to about $20 billion in the past 12 months as banks’ raise rates, increase minimum deposits and toughen repayment terms and conditions.
And as the RBA governor Philip Lowe and ANZ chief executiveShayne Elliott both warned on Tuesday, loans are only going to get harder to get as costs rise because of the bad behaviour of banks exposed in the banking royal commission.
Bank of Mum and Dad, a term used to describe parent lending to their children for property purchases, is now the tenth largest lender, bigger than ME Bank, AMP Bank and the local operations of global banking giants like Citigroup and HSBC Australia.
“Savings for a deposit is very difficult at a time when many lenders are requiring a larger deposit as loan to value rules are rising,” said Martin North, principal of Digital Finance Analytics, which complies the annual survey on parent financing of home loans.
Parent lending growth compares to a 2 per cent overall increase in interest only lending and 8 per cent for principal and interest. Lenders are increasing rates because of rising funding and compliance costs, despite the Reserve Bank of Australia not increasing cash rates.
The sector is unregulated and reveals that overall housing debt is even higher than record levels recorded by the official statistics, which might have implications for bank underwriting standards, analysts warn.
More than 55 per cent of first time home buyers require financial assistance from their parents, with the average cash contribution being around $89,000.
Vacant land at record highs
The number of children needing financial assistance getting into the property market is increasing as the total number of first time home buyers continues to fall, which means many without parental support could be giving up.
Recent analysis shows property in the most exclusive postcodes has “earned” up to 22 times more than its owners, as soaring house prices have easily exceeded take-home earnings, particularly around Sydney.
Vacant land on the outskirts of Melbourne and Sydney is also posting record high prices.
Younger property buyers increasing reliance on parents to get into the property market reflects tougher lending conditions and difficulty saving deposits in rapidly rising property markets.
Younger buyers also find it difficult to save because of flat incomes, rising costs and the need to have a sizeable deposit to qualify for generous state-government first home owner grants.
Many parents have also benefited from big increases in the value of the family home, which have quadrupled in Melbourne and tripled in Sydney over the past 20 years, according to CoreLogic, which monitors property prices.
“There are risks attached to this strategy, for both parents and buyers, but for many it is the only way to get access to the expensive and over-valued property market at the moment,” Mr North said.
“Of course, if prices fall from current levels, both parents and their children will be adversely impacted in an inter-generational financial embrace,” he said.
There are broadly divergent views on the property outlook.
Investment bank Morgan Stanley warns the residential outlook continues sliding to new record lows with prices this year expected to slump by about 8 per cent and lending to fall by more than one-third.
It warns tough macro-prudential controls, rising funding and compliance costs and tougher creditworthiness checks on property investors will contribute to loan growth falling from 6 per cent to 4 per cent.
But the ANZ-Property Council survey claims confidence is at a record high and the good times are set to roll onto other national capitals, particularly Hobart and Adelaide.