At What Cost, The Bank Of Mum And Dad?

Emma and Nathan are on a collision course. They are homing in on the same goal, but they come from different backgrounds: and it´s about to prove decisive. Emma is only 23 but has already enjoyed numerous family holidays abroad; plus, her private school education has led to friendships which are now opening some very helpful society and employment doors. Nathan is 22 and will soon finish his electrical trades apprenticeship. He works for a local contractor and, on his salary, has only managed a few domestic holidays since leaving school. Nevertheless, over four years he has saved up his deposit, arranged a bank loan and is excited beyond belief at the prospect of becoming an apartment owner this Saturday at an auction for a place in the suburb where he grew up. Unbeknownst to Nathan, Emma has something he doesn’t have: a Bank of Mum and Dad (BoMD).

At the auction, Nathan goes to his limit, and then Emma goes beyond it, thus securing the property. In reality, her line of credit didn´t have a limit, just a loose agreement between parents and daughter that “perhaps $750,000 would be the top price for this place”. In the end, she paid $40,000 less than that amount: so Mum and Dad owe her big time (ha ha).

There´s no law against sourcing funds from the BoMD. Parents offer money and children accept it all around the world every day. It´s only a question of economies of scale. Some parents can´t offer anything; some can only give maybe $10K towards the purchase; others can stump up $50K; some $300K; and the really wealthy can assist with seven figure amounts. In 2010, Bernie Ecclestone, the ex-boss of Formula One, famously bought his 22-year-old daughter, Petra, a sprawling mega-mansion in the Chelsea district of London for £60 million. There was no attempt to conceal that daddy had come up with the money, nor any suggestion that Petra had saved hard for a deposit. All good fun for those who can afford it.

The problem with the BoMD idea is that it perpetuates a false marketplace: one which is neither fair nor open. Which is ironic, because financially successful people usually admire the capitalist system which, they say, encourages enterprise and allows the open market to reward such enterprise. In contrast, the BoMD allows those with extra “outside” money to swoop in when the ordinary bidders reach their limit. The Nathan´s of this world are just part of the process for the Emmas. She always knew her BoMD-guaranteed price was likely to be well above the ordinary bidders. And even if she had been beaten by another BoMD bidder, no matter. There´ll be another property next week.

The first effect of people paying above the market price for a dwelling is that the overall market rises. The second effect is that rental prices go up as a direct result, which creates multiple problems for Nathan. Priced out of buying in his own neighbourhood, he now also finds his rent going up. So, either he eats into his deposit to pay his rent or he looks to buy (or rent) in a cheaper market. That market could be far away from his work and family, requiring more travel time and less free time. Sometimes the Nathans have to move to another town or state. It is this progressive departure of its people that causes a community to slowly fracture and lose its identity.

The esteemed Australian economist, Saul Eslake, says home ownership is now the biggest driver of inequality among Australians. “The home ownership rate among people aged under 35 is back to where it was in 1947,” he recently told Australian media. “Among people aged between 35 and 44, it´s back to where it was in 1954,” he added. The BoMD is but one of numerous influences which have caused this inequality in the Australian housing market. Government policy, foreign money, and cashed-up investors play a significant role. Nevertheless, there is increasingly a two-tiered property market: where the Emmas can buy, and the Nathans cannot. Indeed, the longer that Australia´s Nathans are kept off the wealth-accumulating property ladder, the fewer assets they will have upon retirement. This means greater dependence on government subsidies. It also means that adult Nathan will have less (or no) opportunity to help his children enter the property market. And so the cycle continues.

Meanwhile, for Emma, the BoMD is the gift that keeps on giving. Often, the BoMD may take an equity stake in the initial purchase; let´s say at least half of the $710K that Emma paid. Thus, on the considerably reduced bank loan she now requires, Emma´s monthly mortgage repayments have become entirely manageable for her. (In truth, given her fluctuating income stream, no ordinary bank would have lent her anywhere near the full purchase amount in the first place, even if she had a deposit, which she may not have). Compare that to Nathan, who had saved his deposit and had arranged his bank loan: but missed out. That´s what inequality looks like. Adding to Emma´s satisfaction – even sense of entitlement – is that she intuitively knows her debt to Mum and Dad on their equity stake will most likely be “forgotten” somehow over time. Call it, taking early inheritance. Meanwhile, Nathan no longer plays footie with his local team because he is now renting somewhere across town.

The scar of inequality is prominent also in the United States and the United Kingdom, with both nations currently riven with social discontent. Large parts of cities and communities feel disenfranchised, believing they have been “left behind” by their own society. They claim to be not benefiting from the wealth their countries are producing. In a growing world of “haves and have nots”, the rise in far-right activism is a symptom of a society divided. A recent study from the Pew Research Centre found that 79% of Australians think that today´s children (the Nathans) will be financially worse off than their parents. Meanwhile, the Emmas, those whose nest was feathered by the BoMD, will continue to live in their privileged cocoon – untroubled by events elsewhere.

Which brings us to the actual Mums and Dads, the ones who finance these decisions. The ones who, quite understandably, only want what´s best for their child(ren). In that vein and before offering the money, I presume many of those parents would pause to ask themselves a few questions, such as: How much advantage is enough? What type of person are we creating? When is it the right time to let our adult child struggle, so he / she can truly appreciate the satisfaction and reward of triumph? Or learn the lessons of failure? We often hear people (especially immigrants) saying: “I don´t want my children to have to suffer the way I did”. But that same person then glorifies his struggle and claims it turned him into the successful man he has become. In which case, why deny your children the same path towards self-esteem?

Instead, at its upper levels especially, the BoMD routinely gives a select group of young people, who´ve already received a fabulous head start in life, a free ticket into the wealth-accumulating property market. And what do they do with it? Usually, just replicate the lifestyle into which they were born. Nothing more. To which I would ask the parents: with all those resources available, was there no greater ambition for your offspring than that? No greater calling in life to which you would wish they aspire?

The BoMD is a reality which will continue to exist because, as humans, we tend to look after our own tribe first: and often, our own tribe only. However, with half of the world´s children struggling to eat or even be safe, is there room for a bit of compassion? In the BoMD process, where perhaps $1M might go towards Emma´s next house, is there just 1% of that amount that could simultaneously be made available to the under-privileged of the world?