The Rising Influence of the “Bank of Mum and Dad”
In recent years, the financial contributions from wealthy baby boomers and Generation Xers to their children have become a significant factor in the property market. This phenomenon, often referred to as the "bank of mum and dad," is reshaping the landscape of homeownership and housing affordability. Parents, particularly those who benefited from steep increases in property prices, are increasingly filling a vital role in helping their children onto the property ladder with a sizeable amount of assets.
A Case Study from New York and Ireland
This trend is not limited to Ireland. New York magazine recently detailed how parents are transferring trillions of dollars to their children, while the Financial Times likened the situation to the old TV drama Upstairs Downstairs. The parallel highlights the evolving disparity between those who can afford to own a multi-storey home (the "upstairs") and those who are stuck renting (the "downstairs").
In Ireland, recent estimates indicate that over half a billion euros in gifts are pouring into the property market annually. This infusion of cash is making an already pricey property market even more expensive.
The Impact on the Market
Parents’ gifts are undoubtedly a key contributor to the rising cost of housing. Just last week, the Skipton Group in the UK emphasized that only 1 in 10 potential first-time buyers can afford to get on the property ladder without family financial help. Michael Dowling, managing director of Dowling Financial mortgage brokers, highlighted that financial support from parents is causing a significant rise in property prices. According to industry experts, gift amounts have surged dramatically over the past five years, often playing a pivotal role in determining a property purchase.
In Dublin, Martina Hennessy, chief executive of mortgage broker Doddl.ie, notes that 3 in 10 clients receive gifts to purchase a home. Among those, an average gift is €27,000 though 15% receive a gift over €100,000, with an average of €198,000.
Data and Statistics
In 2021, the Banking and Payments Federation Ireland (BPFI) collated figures showing that first-time buyers received €149 million in financial help from family in the first six months, and €60.5 million for those trading up. On the annual basis, it meant about €420 million in gifts a year. Now, experts suggest the scale of gifts is well over half a billion euros annually.
Shifting Trends in the Housing Market and Gifts
Parents who have the means are increasingly looking to gift now, closing the affordability gap for their children now, rather than waiting for inheritance to be passed on later.
Given the drop in rates of return on traditional savings and deposits, parents are gifting funds which they would have otherwise deposited in banks. Additionally, since baby boomers saw property values soar during their lifetime, they see gifting and investing in housing as a natural extension of their own prosperity.
Understanding the Increasing Prevalence of Gifting
Currently, almost €155 billion is languishing on deposit in Ireland, illustrating a significant excess of savings which could potentially be redirected to younger generations. Coupled with falling interest rates on these deposits, it encourages those with substantial funds to gift money now, making a significant impact on children’s lives, rather than waiting until death.
Did you know?
Since 1982, property prices have seen astronomical increases, such as in Blackrock, where a five-bedroom detached home that cost £79,000 in 1982 is now valued at over €1 million. The phenomenal price increase is more than just inflation.
Understanding the increasing prevalence of Gifting
Gifting is prevalent and significant. It has moved from being a supplemental asset to a crucial contributor. Brian Dempsey, a partner in DNG Stillorgan, asserts that a gift from the "bank of mum and dad" now often plays a pivotal part in buying a home in today’s market. This makes it more difficult for those without familial support to enter the market.
The Effects on Saving and Goals for Buyers
With high rents, saving for a downpayment is a difficult task. Figures for Central Bank shows that home buyers now typically purchase a property with a significantly higher down payment. As of the first quarter, the average loan to value ratio on first-time buyer loans was less than 80%, indicating a typical 20% deposit.
Rising House Prices and Corresponding Trends
The impact of extensive gifting means that some new homeowners are skipping the starter home phase and buying for the longer term. This means they do not necessarily borrow less—just use a higher gift to buy more expensive properties to close the gap.
Financial Pressure on Parents
The scale of gift-giving is such that many parents feel an obligation to help their children, even if they cannot afford to do so. This can result in parents dipping into savings intended for retirement.
Did you know?
An estimated 680,000 homes in Ireland are owned freehold according to 2022 Census data, illustrating the high demand for properties and the variance among housing demographics.
Complexities in Relationship Handling
Parental gifting can arise complications, especially for unofficial couples. Without legal agreements, it can be challenging to allocate funds accurately, leading to disagreements and potential legal challenges—especially if the couple splits. This often results in parents deferring contributions or legally structuring the transaction by disguising it as a loan.
Regulatory and Legal Aspects
Given Ireland’s Revenue guidelines, parents might attempt to maximize tax benefits by classifying gifts as loans at times, even if it does not reflect the intended nature of the payment. Revenue has strict guidelines on such loans, potentially complicating future transactions.
FAQ Section
What is the impact of the “Bank of Mum and Dad” on property prices?
The "Bank of Mum and Dad" contributes significantly to rising property prices. This phenomenon creates a more expensive and unequal playing field, particularly for first-time buyers without any financial support. Michael Dowling’s experiences with at least 7 in 10 purchasers relying on family gifts illustrate this.
How can parents decide the amount to gift without jeopardizing their retirement?
Deciding on a gift amount should involve balancing financial aid in property purchasing with retirement planning. However, Brian Dempsey advises that these amounts are increasingly climbing, making it difficult to pare expectations and commit to what’s genuinely feasible.
Pro Tip:
To ensure loans are respected and not legally misinterpreted, initiating small gifts or savings contributions under €12,000 annually to avoid crosses over Revenue guidelines
What if one parent gives more or less help than the other in a couple?
The social pressure of parental gifting can sometimes lead to unequal contributions, creating complications in couples. Ideally, both sets of parents should commit equally. However, in reality, it varies, highlighting the importance of proper documentation and legal advice to ensure fairness and prevent potential future disagreements.
Why are parents turning to real estate investments for their pensions?
Parents are increasingly turning to real estate investments partly due to the growth in property values, which offers them better returns than conventional savings. This enables them to pass on substantial wealth, often relieving the younger generation from цена ждали.
What can be done to bridge the housing affordability gap?
Government interventions, such as the Help to Buy tax rebate, can help bridge affordability. However, adequate new home supply is crucial to mitigate gaps in homeownership distribution.
Table: Distribution of Gift Amounts in Dublin
| Average Gift Amount | Percentage of Recipients |
|---|---|
| Under €100,000 | 85% |
| Over €100,000 | 15% |
Additionally, Parents should clarify legalities on their documents to avoid tax-related financial pressures in future times. Ensuring transparency for assets can mitigate future legalities.
The Future of the “Bank of Mum and Dad”
The "Bank of Mum and Dad" will continue to be a pivotal factor in shaping the housing market. As wealth accumulates among older generations and property values keep rising, it will become an even more standard resource for restocking the property market.
What are your thoughts on the role of the "Bank of Mum and Dad" in today’s housing market? Share your insights below or subscribe to receive future email updates on these trends!