Mortgage brokers say about half of all first-home buyers purchase properties with the help of their parents, sparking warnings New Zealand is at risk of developing a “landed gentry”.
Bruce Patten, of Loan Market, said he had seen parents offer their children gifts of up to $100,000 to help with purchases.
Before the global financial crisis, less than 20 per cent of first-home buyers were helped, he said, because they could borrow up to 95 per cent of a house’s purchase price, at the same mortgage interest rate as someone with a bigger deposit.
But since the loan-to-value restrictions limited how much low-deposit lending banks could do, half to 60 per cent of all buyers needed assistance.
Another broker, Kris Pedersen, said one of his clients had been given $700,000. “But that comes with the expectation this will eventually cover medical costs.”
Glen McLeod, of Edge Mortgages, said parents usually chipped in with anything from $5000 to $20,000. He said half the first-home buyers he dealt with had help.
The brokers said the size of parents’ contribution was usually related to the amount that people had saved in KiwiSaver. Older buyers who had accumulated more in their KiwiSaver accounts would receive less assistance.
Economist Shamubeel Eaqub said it was opening a divide between buyers whose parents could afford to help and those who could not.
It was giving rise to a landed gentry in New Zealand, he said.
Eaqub said it was not surprising buyers needed assistance when the amount of deposit required was so large compared to people’s incomes.
He pointed to Real Estate Institute statistics that showed first-home buyers in Auckland would have to save for 16 years to get enough money together to buy a house.
The deposit needed had been growing at a faster rate than people’s incomes until recently, as house prices shot ahead. “The target is growing at a fast pace and people are never catching up.”
Researcher Jess Berentson-Shaw, director of policy collaborative The Workshop, said it was a significant issue.
“We have a generation of Baby Boomers who have done well due to a strong set of social policies and property investment which has pushed the price of houses up – over 50 per cent of our capital investments in New Zealand is in property, so the reason they have to help their children is the same reason they can help their children.
“However, the same set of circumstances have left a large group of parents not able to help their children- those who were out of work after the massive restructures of the 80s, those who experienced a subsequent cut to their support in the 1990s, those who were ill and not able to work… This creates an intergenerational embedding of unfairness as economic stability concentrates in one group of people, excluding everyone else.”
She said people who benefited from money from their parents today might not be in a position to help their own children.
“The economic and policy environment has changed so much in a generation – student loans, childcare costs, accommodation costs that will need to be covered into retirement, insecure work, transport costs, the cost of superannuation, has changed this newer generation’s economic stability.
“Fewer and fewer of this generation will be in the position their parents were in to help their children. Projecting forward the picture is not pretty if we just expect the Baby Boomers to solve the problem by paying for their kids’ houses.”
University of Auckland Business School lecturer Ryan Greenaway-McGrevy agreed it was problematic.
“It means that those Kiwis that are not lucky enough to have sufficiently wealthy parents are getting left behind. When it comes to getting ahead in New Zealand, hard work is mattering less and less, and family wealth is mattering more and more.”
Ways parents can help:
Acting as guarantor: Parents can offer their own properties as security against their children’s loans. Get legal advice to understand the ramifications of this, and impose limits.
Offset mortgage product: Some banks offer offset accounts where a product such as a parent’s term deposit can be offset against mortgage borrowing – so the mortgage interest rate is reduced in return for less interest paid on the term deposit.
Loan: Some parents offer interest-free loans to children, on the understanding that it will be paid back when the property is sold.
Buying together: Some families are buying houses as a group. The parents can eventually sell their stakes to their children, if necessary.