“Bank of Mum & Dad,” Huge Prop under UK Housing Bubble, is Running Out of Liquidity

“Mum & dad are lending money to their kids so their kids can afford to pay the prices demanded by mum & dad & their friends. It’s like a giant Ponzi scheme but where the victims are your children.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

As the economic growth in the UK stutters — for the first quarter, the UK posted the worst GDP figures in five years on weak business investment and household spending — the country’s all-important housing market is beginning to show signs of strain. In April house sales were down 9.4% on the previous year. In the UK’s most valuable market, London, house prices had their worst month since 2009, slipping 0.7%, according to the latest figures from the Office for National Statistics (ONS).

As credit demand slips, some banks have decided to bring back a financial relic that should never have seen the light of day in the first place: the 100% mortgage. Both Barclays Bank and the recently privatized Post Office have recently unveiled 100% mortgage deals.

A high-risk loan instrument that helped fuel madcap property booms in countries like Spain and the UK, the 100% mortgage allows property buyers to borrow the entire amount of the purchase price. During the heady days of the UK’s pre-2008 property boom, some banks even offered loans that were 20% more than the property value. They included Northern Rock, one of the first lenders to collapse in the Global Financial Crisis.

Mortgages for 100% (or above) of the purchase price not only help fuel high-octane housing bubbles, they also make them a lot riskier when home priced decline, and when more and more borrowers end up with negative equity – where someone’s home is worth less than their debt. That, in turn, significantly raises the likelihood of borrowers defaulting on their loans. And that’s why these 100% mortgages are risky for banks.

Today’s new breed of 100% mortgages has a twist in its tail: to provide the banks extra security, they are insisting on family members acting as guarantors for parts of the loans. In other words, if a borrower falls behind on repayments, a parent’s home can also be put at risk.

This kind of deal is becoming increasingly common in the UK, where property prices still remain close to their all-time high despite fears prompted by Brexit and the recent cooling of London’s property market. Underpaid and over-indebted, many young people cannot afford to put down even a 5% deposit on houses whose prices, after they’re adjusted for inflation, have almost doubled in the last 20 years. And a 10% or 15% down-payment is totally out of reach. Their only hope of getting onto the “property ladder” is to get a financial leg up from their parents.

So widespread is this phenomenon that in 2017 the so-called “Bank of Mum and Dad” became the ninth biggest mortgage lender in the UK shelling out some £6.5 billion in loans. Parents helped provide deposits for more than 298,000 mortgages last year — the equivalent of 26% of all transactions. “The Bank of Mum and Dad continues to grow in importance in helping young people take their early steps onto the housing ladder,” said Nigel Wilson, chief executive of the financial service company Legal & General.

It is not driven purely by altruism. The UK’s multi-decade property boom, propelled by artificially low interest rates and supportive government policies, has provided a huge source of wealth for baby boomers. If the Bank of Mum and Dad didn’t lend this money to the new generation, demand for new mortgages would dry up and the UK’s multi-decade housing bubble would have begun to deflate some time ago. As a result, the houses that mum and dad own would lose much of their “value” and their respective net worth would plummet.

“Mum & dad are lending money to their kids so their kids can afford to pay the prices demanded by mum & dad & their friends,” explained buyers agent Henry Pryor. “It’s like a giant Ponzi scheme but where the victims are your children.”

More than one in four transactions in the UK’s property market this year will depend on the Bank of Mum and Dad’s financial support, according to Legal & General. The “bank” is expected to help fund 317,000 homes this year, up 3% on 2017. It’s not just twenty and thirty somethings that rely on its “lending”: 20% of those aged between 45 and 55 are also receiving some form of assistance.

There are two major problems with this trend:

One, only those with affluent parents get access to the cheap (if not free) funds. This further exacerbates the already high levels of wealth inequality in the UK. To lend their children a helping hand, some less moneyed parents may decide to remortgage their homes or serve as guarantors on the sort of mortgage deals mentioned above, but at the risk of losing their own properties in the process.

And two, the Bank of Mum and Dad does not have infinite resources at its disposal. In fact, while parents may be playing an increasing role in mortgage transactions, the actual amount they’re ponying up appears to be falling. Overall lending is expected to drop to £5.7 billion this year from last year’s peak of £6.5 billion.

“People are feeling a bit of a pinch around the economy and therefore we’re seeing pretty much a national trend outside of London for less to be given,” Nigel Wilson told the BBC. If that pinch continues to grow, the Bank of Mum and Dad could lose a large part of its liquidity. And with it, the UK’s housing market, which has provided a vital source of artificial wealth creation over the last three and a half decades, could lose its final pillar of support. By Don Quijones.

Blackstone Group, Cerberus Capital Management, and others face a problem. Read…  Wall Street Mega-Landlords Piled into Spain’s Rental Property Boom, and Now it Hits a Wall? 
 

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  37 comments for ““Bank of Mum & Dad,” Huge Prop under UK Housing Bubble, is Running Out of Liquidity

  1. Kk
    Jun 1, 2018 at 12:04 am

    That the Bank of England allows the banks to go back to mad lending practices indicates how terrified they are of a housing price collapse

    • RepubAnon
      Jun 1, 2018 at 10:07 am

      This is sort of like being so afraid of serial killers that one invites Freddy Kruger and Jason to move into one’s home.

      What it tells me is that the “I’ll be gone, you’ll be gone” mentality is still strong in the financial industry.

  2. Steve clayton
    Jun 1, 2018 at 1:01 am

    You’re right Kk, another new mortgage to come out in the UK is the mortgage which you can have in your retirement until you die, presumably pay off when you die. As a person living in the UK the housing market is due a correction especially in London.

    • Frederick
      Jun 1, 2018 at 1:46 am

      From what I’ve been reading the correction has already started in London with Brexit being a contributing factor

      • Jun 1, 2018 at 9:49 am

        Frederick,

        Reading information would be step 1…Thanks for repeating whatever it was that you read….

        Step 2 would be interpreting the information to see whether it fits into your present understanding of how the process works, if not making adjustments to the information or your understanding of the process to see what fits where….You need to get on step 2…

      • Steve clayton
        Jun 1, 2018 at 11:22 am

        The biggest factor isn’t Brexit, it’s the fact that houses the size of matchboxes have been sold for crazy amounts of money in London.

  3. William Smith
    Jun 1, 2018 at 1:42 am

    If mum and dad lose liquidity then consumer confidence is also affected, causing an unfortunate downward spiral. They might consider to start saving more “just in case”. This is not just a UK problem but also in australia. It’s called Elder Abuse where the parents are being used to go guarantor for all sorts of things including business loans for the kids; as the current Royal Commission into Bastardry is showing. The banks are allowing this immoral activity (even falsifying documents!) because they get their money in the end and don’t care about the lives they ruin. The only chance that the youngers have is to NOT HAVE KIDS, as is increasingly happening in the EU (especially Italy). This is the hidden dirty little secret and has already been going on in Japan for a long time. Governments, Corporates and The Church are sh*t scared because their business Ponzi models require new entrants into the market (infants). No infants means no spending on the nest. When the population get older (as in Japan), they need less stuff. Certainly, their high-ticket-item Cap Exp (white goods, furnishings, cars etc) goes right down. They don’t even spend as much on entertainment. So this inability of the youngers to “nest” will have serious consequences. The Titanic can see the iceberg clearly now, but all they can do is rearrange the deck chairs in different patterns.

  4. Cynic
    Jun 1, 2018 at 4:02 am

    Very good article. House speculation is simply everything in the UK.

    I believe Gordon Brown, PM, (‘the man who saved the world in 2008’) thought he was secure ‘because they can pay their mortgages’.

    Almost his only economic objective one suspects.

    And remember, so many construction jobs depend on healthy churn in the housing market and an expectation of steadily rising values.

    People are very naive: they imagine that if their house has doubled in value that they are richer, oh dear……

    The UK is a very fragile – even disintegrating – economy, one can see the signs everywhere.

    Anecdotally, I know that house sales are becoming very difficult in London, as buyers are aware of the falling values and negotiating hard or just not making any offers at all.

    Lots of people are resorting to extensions rather than moving.

    Builders are currently very, very busy and it is hard to get one -not that one would really wish to deal with most builders, so cocky and arrogant are they.

    • Steve
      Jun 1, 2018 at 7:12 am

      Gordon Brown, famous for two quotes, “no more boom and bust” and “I won’t let house prices get out of control”, it’s no wonder we got rid of him at the first chance.

      • Gershon
        Jun 1, 2018 at 8:04 am

        Don’t forget about Gordon Brown selling off the UK’s gold stockpile for $255 an oz and foolishly “investing” in a basket of (fiat) currencies. His bankster pals picked up tonnes of gold on the cheap.

    • Leser
      Jun 1, 2018 at 8:21 am

      House owner doing extensions and builders being very busy: on anecdotal evidence my impression is that house owners who had been seeking to sell for some time, now, facing a slowing market, resort to “upgrading” to raise the value. Typically major work including removing walls etc, not just new flooring or bathroom/kitchens.

      Similarly, I know several people who recently bought a house – knowingly paying too much compared to either the value of it or their own income – and baked “doing it up” in their investment thesis.

      • Cynic
        Jun 1, 2018 at 11:01 am

        I’m in a property hot spot, on the edge of a major city: I see all new purchasers – at absurd bubble prices – immediately doubling the size of the houses (generous plots for England).

        All middle-aged, with kids, 8yrs to 12yrs on the whole.

        It sounds like a building site these days, I shall be relived when it is all over, however big the Bang!

  5. hotairmail
    Jun 1, 2018 at 4:38 am

    Whilst what you say about parents protecting their own house price wealth by providing loans to their offspring may be true, I don’t think parents really have that in mind at all. They just want to help their kids onto the ‘ladder’ if they can and by implication ‘settle down’ and have families themselves.

    Time for the entire rotten edifice to come crashing down though. That is the best way to help the young. Banning buy-to-let mortgages on existing properties should be the very first step to stop low lifes from cornering the market and living off the work and incomes of the ‘young’ (up to age 45 now!). Tories should get a move on or the property owning democracy and their electoral prospects will be lost for a generation or more.

  6. Tom Welsh
    Jun 1, 2018 at 4:41 am

    As a matter of interest, why does this article talk about “the country’s all-important housing market”?

    I can’t see what economic importance it has. All it consists of is people giving money to other people in exchange for ownership of houses that already exist.

    Nothing useful is made or done. On the contrary, quite a lot of valuable time, effort and money is wasted.

    An important market would be one that produces food, or clothing, or vehicles, or computers.

    • Pym of Nantucket
      Jun 1, 2018 at 9:05 am

      It’s all important in solidifying the control banks and extreme wealth/oligarchs have over government and media.

  7. Maximus Minimus
    Jun 1, 2018 at 5:28 am

    Are UK mortgages nonrecourse or full recourse? What would happen to the collateral of the guarantor in case of default?

  8. paul
    Jun 1, 2018 at 5:45 am

    Non recourse.
    In these cases the guarantor would have continue paying the mortgage when the offspring defaulted. If they in turn default the property returns to its owner, the mortgage issuer.
    You don’t get the deeds to the house until the mortgage is settled in full.

    • Steve
      Jun 1, 2018 at 7:20 am

      In practice the government will pay the interest on a mortgage for someone out of work. It was changed during the last recession to stop people being thrown on the street, that had the side effect of stopping a house price crash.

      This was just changed from a free payment to a loan, with interest, to be paid on sale of the property. I wonder who gets 1st charge, the government or the bank?

  9. Jon
    Jun 1, 2018 at 7:02 am

    As a youngish person in London, I would concur with much of this. However, it should be mentioned that UK inheritance tax, and the growing aged care crisis, has created a large incentive to give wealth to you children earlier rather than later. It may be that a reasonable number of wealthy families doing inheritance planning are skewing the figures. Also note that the recent changes to stamp duty make it massively advantageous to buy a second property through a family member, rather than for yourself. To benefit the parent cannot be joint owner, so would have to act as a gaurantor from a legal point of view. I would not be surprised if this was having a large effect as well.

    • Steve clayton
      Jun 1, 2018 at 11:27 am

      Spot on Jon ref Inheritance tax, as long as you don’t die within 7 years then you won’t get Inheritance tax charge.

      • peter
        Jun 2, 2018 at 7:01 pm

        Jon and Steve have nailed it. Inheritance Tax is one of the main reasons it is good to be in debt when you die in the UK. We were smart and made allowances for IHT when my parents died, and the bastards still took over 35,000 pounds in IHT. Because they owned a house with no mortgage. So best thing to do is get a debt, reduces your net worth and then you can die knowing the government get nothing.
        And remember, the house and everything in it is paid for out of taxed money, so it is a jealousy tax, ie it’s not fair that you were smart and saved and built something. The sooner people get their head around the fact that it is no longer a tax on the super rich, but on pretty much everyone now, the better.
        So why not get a debt, reduce your tax liability and pass on your hard earned wealth to your kids instead of the taxman? Makes perfect sense to me. Not like we don’t pay enough tax as it is, but a tax on dying is just plain wrong. Birth tax anyone? Why not?

  10. Gershon
    Jun 1, 2018 at 8:06 am

    That, in turn, significantly raises the likelihood of borrowers defaulting on their loans. And that’s why these 100% mortgages are risky for banks.

    The banks correctly figure they are backstopped by taxpayers and the central bankers’ printing presses in our crony capitalist wonderlands.

  11. Gorbachev
    Jun 1, 2018 at 8:24 am

    World wide, what to do.Watch cash depreciate fast or take big

    risk in real estate or buy the pretty but useless metal, gold or

    buy stock where the CEO’s avoid the sharing of difficult bits.

    • L Lavery
      Jun 2, 2018 at 2:27 am

      Or buy bitcoin, it’s deflationary. A new book, “The Bitcoin Standard” by Saifedean Ammous, argues bitcoin from an economics point of view, as apposed to a technical one. Money that doesn’t lose value over time, how novel is that!

      • LessonIsNeverTry
        Jun 2, 2018 at 2:12 pm

        Unless it is out-competed by the legions of low barrier to entry coins that have (and are yet to) come into existence.

    • John M
      Jun 2, 2018 at 1:16 pm

      Gorbachev

      Your throw away line on a useless metal is just that. There are 4000 years of historical relevance vis a vis precious metals. That the world has been off the defacto precious metal standard for 47 years does not negate the profligacy of both Central Banks and governments world wide. Nor does it wipe out history.

      In 2011 The Federal Reserve published a study of John Law of the French Exchequer and the use of “Paper” money in the Parisian 1720’s. The Fed reported that he “John Law” nearly did “it”. He nearly pulled off what medieval “Alchemists” called turning “paper” into gold. His currency lasted but 3 years.

      In AD 188 the Roman empire paid soldiers with a 90% silver based coin called the Denarius. By 288 AD there was no silver content in the then version of the Denarius as it was a base metal theesen dipped into silver.
      These lessons need to be relearned by Central Banksters. (To keep them honest~ a tough job to do)

  12. Tom Stone
    Jun 1, 2018 at 8:34 am

    There’s nothing to worry about, “Suzanne researched it”.

  13. MJN
    Jun 1, 2018 at 9:02 am

    Surprised? Nope.

  14. DIZZY
    Jun 1, 2018 at 9:32 am

    After repeating the words Mum& Dad so much in the so called article it was making me dizzy. Who writes this stuff..And what bank is used, not a mention of it.

    • Jun 1, 2018 at 9:59 am

      In the US, we call it the “bank of mom and dad.” It’s a common expression. “Mum” is how they spell it in the UK. The “Bank of Mum & Dad” means that the kids are borrowing from their parents, instead of a real bank.

  15. Mean Chicken
    Jun 1, 2018 at 11:27 am

    Is it time to resume biting my nails and gnashing my teeth?

  16. raxadian
    Jun 1, 2018 at 1:09 pm

    This can only end in tears, both from kids and parents.

    You want to pop a housing bubble? Allow working for home to be a thing again.

    And not exactly the right place to post this, but Wolf already gets enough junk mail as it is.

    https://www.theguardian.com/money/2018/jun/01/visa-card-network-crashes-and-sparks-payment-chaos

    This time is not a stupid bank who wanted to save money and rushed things, is freaking VISA!

    Thankfully I canceled all my crebit cards way back on 2003 and never regreted it.

    Still got debit but those still seem to be working.

    Honesty, what’s with Europe and stuff like this happening?

  17. Ambrose Bierce
    Jun 1, 2018 at 1:33 pm

    Here in the US we have the 120% appraisal. Enough for a 10% down and some mad money.

  18. Gian
    Jun 1, 2018 at 9:19 pm

    How are the children victims? It sounds like they have no or little skin in the game. They default on the bank of mum and dad, who then lose the money they loaned to their offspring. To make matters worse for mum and dad, they may also lose their home if pledged as collateral for the kids’ home. Starting to sound like the US when banks were blamed for ”predatory” lending and the deadbeat co-conspirators were viewed as victims. Investments have an inherent risk, including real estate. If you can’t afford to lose your money, you should rent in perpituity.

  19. R Davis
    Jun 2, 2018 at 11:59 am

    And If They Don’t Introduce 100% Borrowing:

    Is it that the housing market will fall to pieces -?
    Is it that there is no where else to go but down -?

    Which means that everyone loses – right.

    Is it that it is the only way up -?
    Is it also that the average wannabe homeowner will not venture here.
    That mostly high rolling property investors will utilise thai advantage ?

    IF SO,
    WHY -?
    WHAT IS THE BENEFIT TO THEM HERE -?

    Tax Evasion ???
    Allocating blame to the average Joe when the bottom falls out -?
    By pretending that it wasn’t them.

    I do not see any problem with 100% borrowing – if the borrower is locked into a fixed interest rate – the loan allows a realistic time frame to repay.
    After all – we do want home ownership – don’t we -????

    Sorry Don, but I cannot see the establishment going to the effort of introducing this scheme if it was no to benefit them.

    • R Davis
      Jun 2, 2018 at 12:10 pm

      Just while I’m here:
      I have done some looking into the abandoned Malls.

      Is it that
      In the first place these constructions were built NOT TO LAST ?
      That they were built CHEAP & NASTY under the inspiration –
      “lets knock up a shack & make as much money – as fast as we can before it falls apart on us?”
      “Don’t worry, we didn’t lose anything – with all the lurks & perks it cost us nothing to build in the first place.” they laughed as the walked away from the waste.
      Rather than “the Malls are no longer trendy enough.”

      • R Davis
        Jun 2, 2018 at 12:16 pm

        In Victoria, where I am, the malls / shopping centers are full to overflowing. I like to be outside Kmart, etc., 8:00am, on a Saturday or Sunday as they open the doors. I am leaving with shopping in tow as the shoppers are arriving & in numbers.
        I cannot see that Americans are that much different to us ???

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