Most high street banks were forced to shrink their balance sheets drastically in the wake of the great financial crash of 2008-09. But one went in the other direction. It was, of course, the Bank of Mum and Dad (BOMAD).
While commercial banks pulled in their horns and reduced the availability of mortgages to first-time-buyers, parents who could afford it stepped up their provision of financial assistance for their children in order to help their relatives clamber on to the bottom rung of the housing ladder.
And BOMAD is still expanding. House prices continue to rise, easily outstripping average wage growth, meaning it remains very hard for many young people to buy. According to estimates in a new report commissioned by the insurer Legal & General BOMAD will provide £5bn of financing this year for house purchases. And that will underpin no less than 300,000 residential housing transactions ‑ a quarter of the expected total.
Nigel Wilson, the chief executive of L&G, raised the familiar theme of “intergenerational unfairness” in his response to the findings. Yet what BOMAD really underlines is that this isn’t so much about the young versus the old, but poor families versus rich families.
What we see in BOMAD is the growing tendency for money and wealth to stay in the same family unit. And cash gifts and soft loans to first-time buyers are only one element of this story.
When the baby boomers approach the end of their lives over the coming years they are likely to start transferring the ownership of their own (often very valuable) houses to their children in ever greater numbers. That will further entrench wealth inequality as those families which have benefited from property price appreciation keep the gains locked in the family unit. The inheritors may find themselves, thanks to “equity release” mortgages, in a position to make even larger loans from BOMAD to their own children than their own parents made to them.
There’s a popular cognitive dissonance here. Housing is one of the largest sources of household wealth in the country, second only to private pensions. For most people the family home is their most valuable single asset. Opinion polls suggest a majority of people are concerned about the high levels of wealth inequality in Britain. A poll in 2014 found 56 per cent would favour a more equal distribution of wealth even if the total amount was reduced. Yet polls also find that inheritance tax is the also single most unpopular state levy – even though most people will never pay it thanks to hikes in the threshold by successive governments.
People need to wake up to the fact that if we truly desire lower wealth inequality we have to tax inheritance more – especially family homes when they are passed on to children. And from an anti-inequality perspective, a lifetime gifts tax, as proposed by the Institute of Fiscal Studies and others, is the right way to deal with transfers from BOMAD. If you gift £20,000 or more to your children why exactly shouldn’t the children pay tax on it?
Residential housing is enormously tax privileged. A lot of anger is vented against the supposed advantages of Buy-to-Let landlords in the property market. Yet the biggest beneficiaries of government tax breaks are ordinary homeowners. VAT is not charged on the sale of new homes; nor is capital gains tax levied on someone’s main residence. These tax breaks are part of the reason the returns one can receive from residential property exceed just about any other form of saving. It’s no real surprise that so many people plough money into their houses – pushing up prices. A new paper by the National Institute of Economic and Social Research suggests this long-standing tendency is doing economic damage by diverting household savings away from more productive commercial uses.
The tax advantage for residential housing should be corrected. The simplest way would be to impose an annual property tax on the market value of all homes, a levy that rises as houses become more expensive. This could be done relatively easily through a progressive restructuring of the council tax. But note that the same people who complain about buy-to-let are often the same people who fiercely object to any suggestion of reforms to property taxation.
Mr Wilson of L&G rightly stresses that the ultimate solution to all this frustration and confusion is simply to build more houses. But again, we see cognitive dissonance at work. I suspect many of us will have heard older people, in one breath, complain about the difficulty their children face in getting on to the housing ladder, while, in the next, complaining about the “inappropriate” plans for a new residential development nearby.
These are two sides of the same coin. If you fight against the construction of new housing in your local area you are responsible for pushing up house prices. And when you help push up house prices you are making it harder for young people to get on the housing ladder.
If you resent having to pay out gifts and soft loans to help your children buy their first property, do not lobby against more homes being built. If you are concerned about levels of wealth inequality do not revile inheritance taxes and vote for politicians who pledge to reduce them. If you are concerned about the social impact of soaring house prices do not go into meltdown in the face of mild proposals to make people pay more in council tax. These things are all linked.
Of course, it may be that most asset-rich people don’t really care about wealth inequality, that they hate the idea of paying more tax more than they do about the divisive impact of rising house prices. They may cherish the quiet of their town or village more than they care about the difficulties of first-time-buyers. It may be that, deep down, they think writing cheques from the Bank of Mum and Dad is a reasonable price to pay for maintaining the status quo.
But let’s, at least, be clear about the choice they – and many of us – are making and face up to how those choices feed the deep dysfunction of our national housing market.
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