For years the bank of Mum and Dad (BOMD) has been touted in the media as one of Australia’s largest lenders.
A whole generation of parents has been reportedly dishing out a seemingly bottomless pool of funds to help frustrated first-home buyers get on the property ladder amidst skyrocketing real estate prices.
However, that is just not the case.
The reach of this unique “bank” has come under the spotlight and it now seems the metaphorical institution is not as active as once thought.
Wealth Transfers and their Economic Effects, a recently released research paper from the Productivity Commission, examined Australia’s intergenerational wealth transfers and has revealed that parents are not handing over as much cash as we have been led to believe.
Despite the common view that younger generations are leaning on parents to fund their lifestyles and buy their homes, the government report showed there is no “strong evidence” of large lump sums being transferred to adult children.
Productivity Commissioner, Catherine de Fontenay, said the results were surprising given the conventional wisdom that suggests parental gifts are far more widespread.
“From what you hear, it sounds as though the bank of mum and dad is a very big phenomenon,” she said.
The research looked at private-sector surveys by comparison websites, consultants, and mortgage providers, which roughly estimated the total lending from parents to be around $35 billion to $92 billion.
That would place the BOMD somewhere between the fifth and ninth-largest home lender in Australia.
But the trouble with capturing such statistics is that what happens between family members tends to stay amongst family.
So, there is no comprehensive data showing exact money movements from the BOMD to the younger generation.
Tracing the full extent of handouts made from the BOMD is further complicated by the fact that these transactions don’t just constitute cash transfers.
One of the ways “the bank” also operates is by parents acting as guarantors for loans through schemes like family guarantees, or even offering free room and board so adult children can avoid rent and utility bills while saving for a home deposit.
Information provided to the Commission by CBA and Westpac (which are home to a combined 50 per cent total of the mortgage market share) showed home loans assisted by parental guarantees accounted for less than 5 per cent of total settled loans each year at both banks.
On average, mortgages with parental guarantees accounted for around 2.5 per cent of total settled loans at CBA since 2017 and around 4.6 per cent at Westpac since 2016.
“That suggests that there’s a pretty small number of loans that are receiving help in that way,’ Ms. de Fontenay said.
Boomers to pass on $224 billion a year to their children
One lucky generation of Aussies is set to inherit a tonne of money in the coming years, and it’s not just the super-rich who will benefit.
The Commission’s report explored the impact of inheritance in Australia, which it found has doubled since 2002 and is likely to keep growing.
They estimated young Australians will inherit as much as $224 billion every year until 2050 as their parents, and grandparents (aka Baby Boomers) pass on the profits of property, the share market, and other investments.
And that transfer of wealth is growing with more than $120 billion passed on in 2018 – double what was accumulated in 2002.
Over 16 years, Australians inherited $1.5 trillion.
A large part of that money movement is from the property.
The Commission forecasts a significant increase in the value of inheritances in Australia over the next three decades, purely based on the booming real estate market, as well as other wise investments and the simple fact that each parent typically has fewer children to leave money to than a generation or two ago.
Although it might feel to many millennials that the Baby Boomers are holding onto all the wealth in Australia, the study showed that inheritances are actually helping to reduce wealth inequality across the country.
“Wealthier people receive more inheritances and gifts on a dollar-for-dollar basis but less as a percentage of their existing wealth,” Ms. de Fontenay said.
“When measured against the amount of wealth they already own, those with less wealth get a much bigger boost from inheritances on average, about 50 times larger for the poorest 20 per cent than the wealthiest 20 per cent,” she added.
“Hence wealth transfers tend to reduce the share of wealth held by the richest Australians and our projections show this is likely to continue. This might be a surprise to some, but it’s been found in every other country that’s been studied.”
While it is promising to note that each generation has been wealthier on average than the previous one at the equivalent age, there is truth to the theory many millennials have been claiming for some time – the Commission’s report clearly showed that Baby Boomers had done particularly well financially.
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