Transcript: Consume This podcast, Episode 2 - The Bank of Mum and Dad (Part 1)

Sophie Richardson: There's a bank in New Zealand that has been rising in prominence. It has no credit cards, bank branches, or ATMs. But what it does have is a massive impact on the housing market. This bank operates in the shadows. It doesn't have a banking license, or report its lending figures to any central bank. And trying to get a sense of its size is kind of elusive. It's rarely, if ever, been quantified.

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On this episode of Consume This with me, Sophie Richardson, we're going to shine a light on one of the country's biggest lenders, pin it down, and finally put some numbers on it. That bank is the bank of mum and dad.

The average house price is currently sitting at 15 times the median income. Twenty years ago, it was roughly six times. What this income to house price ratio shows us is how much harder it is to get into the housing market now than it was two decades ago. People are feeling locked out, because these days it's not enough to just have a good job buckle down and save. Often, hopeful home buyers – if they're lucky enough – are turning to the bank of mum and dad to get a leg up onto the property ladder.

To find out more about this pool of badly understood familial wealth, we conducted some research: a national survey targeted at parents. We asked if they'd made a financial contribution towards their child's first home, and crucially, if they have, how much?

The results were startling! Of parents whose offspring own property, almost half made a financial contribution to help them onto the ladder. And the average amount of money is staggering. We'll reveal that soon.

So let's be clear. What types of financial assistance is the bank of mum and dad doling out?

There are six different options.

1. Living rent free at home for extended periods.
2. A gift or loan of money for a deposit.
3. Going guarantor, which is using equity in a parents house to guarantee a loan.
4. Co-ownership.
5. Helping with loan repayments.
6. Or the really wealthy option: gifting them a house or lending the entire cost of the house.
   

Of all these efforts, helping with the deposit is the most common, with six-in-10 bank of mum and dad lenders helping in this way.

But how much are they helping? I promised you numbers and our research has uncovered them. The average parental contribution was $108,000. One. Hundred. And. Eight. Thousand. Dollars! To put that into context, if we go back 30 years to when I was born, the median house price was $105,000. So that could have bought you a house. This makes the bank of mum and dad a huge enterprise. Add up all those parental contributions and it comes to a total of more than $22 billion. That makes it the fifth-largest lender to owner-occupiers in the country. It's almost $6 billion bigger than Kiwibank and five times the size of TSB.

That's insane. How crazy has the New Zealand housing market got to require parents to stump up more than $22 billion in capital?

Shamubeel Eaqub: Look, I didn't know how big it was, but we knew it was big because it's gotten so hard for people to buy a home. Deposits are so massive that you can't really afford to save it yourself, after rent and all those other bits and pieces. So you really need some help from someone and who better to help you than mum and dad?

Sophie Richardson: This is Shamubeel Eaqub. He's an economist at Sense Partners. And in 2015, co-authored a book with his wife Selena called Generation Rent. Despite its size, the bank of mum and dad is an exclusive club. You can't work hard and gain access. You're either born into it or you're not.

I wanted to ask him from an economic standpoint: what effects is this exclusivity having on our society?

Shamubeel Eaqub: The answer is it sends a very worrying signal that only people who have parents that are rich, that live in big enough houses that are able to support you in your adult life, only then you'll be able to own your own home.

So the homeownership dream in New Zealand has been fading for a long time. The home ownership rate peaked in 1991. That's a long time ago, and it has been falling steadily since then. That means that with each new generation, what we're seeing is fewer and fewer households can live in their own home. And those who do are more likely to be the children of parents who own homes.

That's a far cry from that egalitarian view that we have of New Zealand, that if you work hard and apply yourself, then all opportunities including home ownership is within your reach, which is simply not the case for many people anymore. It means that the wealth is accumulated in a smaller and smaller share of people.

So it gives rise to what I'd call the landed gentry. If you happen to own land, your family will continue to control more and more land because you're the only ones who can afford to do that. So, you know, it's a very loaded term because I think that, you know, when you talk about the landed gentry in a country like New Zealand, people feel like something's not right. You can't say that about New Zealanders. Well, but it's true. We are seeing that hereditary source of wealth, which is quite contrary to the way that we might think about New Zealand. Right? Just because you're going to work hard doesn't mean you can have your piece of New Zealand anymore.

Sophie Richardson: I don't think it's a controversial viewpoint for us to say that rising inequality is a bad thing.

The rich getting richer whilst the poor, and even middle-class, struggle to meet basic needs like housing is not the future we should want for our country. Of course, some of us are born with more privilege than others. But in the egalitarian dream we've all been sold, where we start shouldn't be a major factor in where we end.

Shamubeel Eaqub: Luck has always played a big part in your life course. I don't think we should deny how privileged many of us are. Having educated parents or having parents who own homes or businesses gives us an edge in life that others don't have. But it is also true that in much of New Zealand's history, that wasn't necessary to be able to make a success of yourself.

Whether it was in your housing situation or your income or your financial security, those things were still possible simply through sheer hard work. I think what we're seeing now is that is much, much harder. And the bank of mum and dad is symptomatic. That privilege is becoming more entrenched and that if you don't have that privilege, if you're not lucky enough to born in a privileged house, then your life course may not be as good as your talents and your intelligence and your hard work might otherwise give you.

I would argue the reason why we have economic growth is so that we all become richer and inequality becomes less. What we have instead seen is more people are getting richer and the inequality remains.

Sophie Richardson: So, is this inequality and familial wealth transfer fuelling the massive growth that we've seen in the housing market? After all prices can only stay high if people can afford to pay them. And as we've already discovered, the bank of mum and dad is a huge source of that finance.

Shamubeel Eaqub: Yeah. Absolutely. One of the contributing factors is that as people have access to this money that they would otherwise not have, it's driving up the prices, right?

There's many reasons why housing in New Zealand is so expensive. One of them is that we continue to buy and sell houses from each other at ever higher prices. And the only reason we can do that is the deposit is coming from somewhere. For a lot of people it's coming from their moms and dads, and the banks are willing to lend a squillions of dollars to buy these things.

Those two things are working together. But that was happening against the backdrop of not having enough houses. So it's not just one thing in a housing, it's a complex beast and there are lots of interlinked factors, but this was just throwing fuel on the fire.

Sophie Richardson: Remember the start of the episode when I said that the average parental contribution was $108,000? Well, I want to come back to that number. It's a huge sum of money. Where is all that cash coming from?

According to our research, six in ten parents provided it directly from their savings, but that doesn't quite tell the whole story.

Shamubeel Eaqub: It's a weird thing, you know. It's not necessarily what you classically think. You know, this person is so rich that they're going out in yachts, buying diamonds and drinking champagne every day. They're people like you and me. So they're fairly normal people. And quite often, all they're doing is they had this windfall gain because house prices rose so much, and they're seeing a need in their children's families. And they're trying to match those two things up.

When you read those Dickensian kind of books, it's more kind of the moneyed families, but really we're not necessarily talking about particularly moneyed families, right? Quite often we're talking about households and parents who are not necessarily very rich outside of the house. All the wealth is actually tied up in that one house that they live in.

Sophie Richardson: And that's the big issue. It's not the fact that parents are helping their children. That's been going on for generations and will continue well into the future. The issue is that if you don't have access to family help, it's becoming increasingly difficult to obtain your own house.

So what about those asset rich, cash poor families that don't have thousands of dollars sitting around?

Thomas Swain: Oh gosh. I mean, look, if we're were talking about this topic, I could probably talk for half an hour and just monologue. Which obviously is very, very boring. But it's because it's all people my age talk about. That's it. It's just homes.

Sophie Richardson: Meet Aucklander Thomas Swain. When I rang him for the first time we actually talked for 37 minutes.

Thomas Swain: My story is quite simple. I had an offer on a property like 12 years ago. It was a little house in Takanini for, like, $300,000, which I could afford at the time, just. With a 5% deposit and all rest of it.

And an investor group kind of swooped in and they've paid like 30 grand more. And at the time $30,000 was an enormous amount of money, well above what it had been valued at. And I was like, oh, that's not going to work out.

Sophie Richardson: Thomas didn't give up. The years went on and he kept trying to get into his own home. This all came to a head around three years ago, just prior to the COVID property boom.

Thomas Swain: I had an offer on a property south of Pōkeno. Cause it, you know, that's basically the only place that I can afford anything with, you know, some rooms. And it was about $500,000 or whatever it was. Again, I was stretching myself to the absolute limit in every way to get it.

And another couple came in and they paid 80 grand more and that kind of killed that. And so I just went on renting and paying lots of money to someone else.

Sophie Richardson: He didn't think about going to the bank of mom and dad. His parents both still work full time and have a mortgage on their Hamilton home. That home, like most of New Zealand has shot up in value, leaving them with a lot of equity. In theory, this makes them very wealthy, but they're not sitting around on piles of cash.

Thomas Swain: And my parents are not property investors. They don't have lots of money. They went to the bank with some other financial stuff. And the bank said, look, you know, you're five years or so away from retirement, you should get investment property. And they were like, well, we're not really those kinds of people, we don't really want to do that. And so they said, look, is there anyway- our son's been trying to get a house for years, is there any way we can help him? '

And basically, what mum and dad could do for me was some of the equity in their property could be used to guarantee the house.

Sophie Richardson: We talked about a guarantee briefly at the start of the episode. To recap, that's when a parent puts up their own home to back their child's mortgage. In turn, this allows the child to access a larger mortgage than they would otherwise get.

But there is a risk. It means for Thomas that if he were to default on his repayments the bank could come after his parents and their home.

Thomas Swain: Yeah, so that's the only way that was feasible.

Sophie Richardson: So that's what Thomas and his parents did. They used the equity on their home to give them a leg up. Despite the risks, our research shows that one-in-five bank of mum and dad lenders are opting to support their children in this way.

Using that guarantee, Thomas managed to secure a crumbling three-bedroom house in Wairau Valley for a cool $1 million.

Thomas Swain: All of it. Rotten. There's a pile under the house that's rotten. I mean, there's so many problems. I'm going to spend the next 20 years just fixing them. Then kind of what set in was now I've got a place. Brilliant. But no one else has a place. And so then, you know, this kind of guilt sets it and you go, well, yeah, it's cool having a house, but it's not cool that everyone around me doesn't, and there's nothing I can do about it, to be frank.

It's great to have a place, but do I want places to go up in value? You know, even though I own a house, I don't want it to go up in value because I believe it's killed the Kiwi dream, to be frank. And I think the Kiwi dream, at least if it's not to have a boat and a bach, at least it's to have your own place.

And that's where it feels shit, to be honest. Cause you go: I've got all these friends who are working really hard, having babies, having kids, you know, getting married, who aren't able to live with the same sort of safety, security and wellbeing that I can have. Knowing that I'm not going to have someone come around and inspect the place. And I'm never going to get chucked out.

Sophie Richardson: At this point, you're probably wondering why Thomas needed a million-dollar, three-bedroom house. Why didn't he buy a city apartment? Well, that's depressingly simple. The banks’ lending criteria means that the loan-to-value ratio is higher for apartments than it is for single-story dwellings. He would have had to have a 30% deposit compared to a 10% or 20% deposit depending on his housing situation.

So at this point, Thomas is in his house and his parents are on the hook. As long as he keeps up his mortgage payments, this is a bank of mum and dad success story. Except it's more complicated than that...

Thomas Swain: I've only got this deal with mum and dad for five years till they retire. So when mum and dad retire, I either have to sell the property, take any money that I've made from it and then buy something else. When we started this journey, I said to my parents, well, buy the house together, and then I can give you half when I sell it.

But my parents also did the sums and went, no, no, no, no, no. Don't give us the money, because we want to get you into a house. If you sell it and then give us half the money that you've made, then you're not going to be able to get into another house. So they were like, no, that defeats the whole purpose.

Sophie Richardson: Thomas' parents need to be released from their guarantee on his mortgage by the time they retire, that's just in five years. Put simply, they need that money to retire. The issue with this is that there needs to be enough equity in Thomas' house by that point for the bank to feel comfortable releasing the guarantee. So just now, when Thomas said he didn't want house prices to keep rising... On a practical level that's not exactly true...

He needs them to keep rising.

Thomas Swain: I bought that house for a million, basically in five years’ time, it has to be worth $1.2 million to $1.25 million for me to be able to say, oh, look, there's enough equity in it that the deposit's already in there. And therefore, I can keep it. So that's why I've got to do up the house and I've got to add some value to it, which is why a lot of the money I make in my job goes to renovating the house.

Sophie Richardson: Unfortunately, I'm not sure for Thomas that his bathroom renovation is going to do all that much to increase the value of his house. Renovations can add value, but they can only offer that in the market in which they operate. Basically, you could have a fancy house on a fancy street, but if the market isn't willing to pay you lots of money, it doesn't really matter how much you put into it. Or how many gold taps you brought.

The reason most of us, including Thomas, want to buy a house is to have a safe and secure place to live. But Thomas' home ownership seems less safe and secure, knowing that he has a significant financial responsibility to his parents. And this has piled on a lot of stress.

Thomas Swain: Oh, huge amounts. I've taken contract work left, right and center to be able to afford things like toilets and tiling and everything, you know. And I do my day job and then I come home and I do contracting just to pay for it. Because I'm on the clock and I'm already over six months in to my five years. And doesn't sound very much, but of course the pressure is if I can't work hard enough and do enough renovation work and get the house worth what it needs to in time, the whole thing has kind of been for naught.

It literally consumes you. My partner said to me recently, he said: it's like the house is a person, and it's like you're having an affair. Because I'm so focused on the house because it's like, time's ticking, I've got four and a half years.

And in a way, what I'm trying to do is- I feel like I'm paddling as fast as I can to just keep up with the very fast traffic that all seems to be leisurely going by, and if I take my foot off the pedal, then I'm out of the highway and I'm onto the sidewalk.

And of course, you start looking at- like, there was a house that's gone up for sale two doors down, and I'm subconsciously jotting down the name of the agent because I want to find out how much it's gone for so I can know how much mine's worth. I mean, it's ludicrous. I don't want to be this person.

Sophie Richardson: Thomas might feel like he stuck on the treadmill now, running hard to keep the wheels turning. But it's important to remember, however long and tough his journey has been, he's one of the lucky ones who's managed to use the bank of mum and dad to lift himself onto the property ladder. It's not Thomas's fault that inequality is rising and the market is broken. In his position, most of us would probably do the same.

But the reality of his situation is precarious. If his house price or equity doesn't go up by 25% in the next five years then he'll have to sell. Whatever happens to the market. Equally, interest rates have started to creep up. If they keep rising and he becomes unable to meet the repayments, his parent's house could be on the line.

Shamubeel Eaqub: Sort of. But, you know, because house prices have increased so much, it's almost like a rocket ship. They have to fall a lot. Because if you're thinking about the typical 65-year-old today, they might've bought their house when they were thirty, 30 years ago when asking prices were like $300,000, rather than a million dollars. I think that the risk is actually relatively low for the current retirees.

It's only if house prices just collapsed and the whole economy falls apart and there's lots of unemployment and all those other things. The reality is that the politics wouldn't allow that to happen. So if there was a big bust that's happening, essentially you would see a flood of money and government support to try and stop it.

Sophie Richardson: So, what Shamubeel is saying here is that whilst acting as a guarantor is risky, given the amount of equity held by long-term homeowners, we're still unlikely to see a crash that could result in parents losing their homes. Which is good news. At least for Thomas and his parents.

Thomas Swain: My parents are very ordinary people. And the only reason they could help is because their house went up in value. And the only reason the house went up in value is the same reason that I couldn't buy a house. So yeah.

Sophie Richardson: It's clear that the bank of mum and dad is pivotal to home ownership and is creating inequality across the motu. It's benefiting the few at the expense of the many.

When we think of the bank of mom and dad, we normally conjure up images of wealthy, or at least comfortably well-off parents handing over cash. And while we researched this podcast, we certainly spoke to a fair share of people who fall into that category: people whose parents were able to give them the money. And honestly, more power to them.

If you're a parent with the ability to help your child into a house, why wouldn't you? But what Thomas' story has shown us is that it's much more nuanced. The bank of mum and dad isn't a monolith of rich people. A large part of its $22 billion comes from normal, everyday people who are taking on extra financial risks to help their children.

We should have never let our country get to this point. We shouldn't have got to a point where your ability to buy a home is so significantly linked to your parents' home ownership status, or their ability to lend you $108,000! But we have. The situation we find ourselves in is that parents feel obligated to help their children because they know housing is so insecure and they know that security is only provided through homeownership.

So, what are the solutions?

Shamubeel Eaqub: We've screwed things up for so long I don't think we have quick wins left. It makes sense for parents to help their children, so I think we will continue to see that happen. It's not our role to necessarily fix all social ills individually. Arguably our governments have failed us for the last however many decades. Sophie Richardson: Are there any alternatives, if you don't have access to the bank of mum and dad?

Brandon Vaaulu: Personally, I didn't want to put any more financial pressure on my parents. Once you put it into a house it's a lot harder to get out of the house again.

Sophie Richardson: On this episode, we got the borrower's perspective.

Thomas Swain: And so then, you know, this kind of guilt sets in and you go, well, yeah, it's cool having a house, but it's not cool that everyone around me doesn't and there's nothing I can do about it.

Sophie Richardson: But what about the bank?

Noel Bates: So you go along, you sign a quick guarantee form and off you go. And then a couple of years later, there's a knock on the door. It's the bank that's then saying - well, remember that guarantee your signed ... Well, your son and your daughter are now broken up and your daughter-in-law got a credit card she's maxed out and can't replay it. We'd like you to repay it.

Sophie Richardson: That's on the next episode.

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Sophie Richardson: You've been listening to Consume This with me, Sophie Richardson.

This episode was produced by Tom Riste-Smith. The executive producer was Gemma Rasmussen. Research and analysis by Scott Moore.