Bank of Mum and Dad overstated: Productivity Commission

A new research paper on intergenerational wealth transfers and the resulting economic effects from the Productivity Commission has estimated how much parents help their offspring enter the property market.

As noted in the report, there is no comprehensive data on the “Bank of Mum and Dad” (BOMD), which makes it difficult to assess the size or prevalence of parental assistance, or differentiate between wealth transfers and loans or other help.

Parents can help their children enter the housing market via loans or gifts, acting as a formal guarantor on a mortgage application to avoid lenders mortgage insurance or providing rent-free housing to boost savings, in addition to leaving an inheritance.

The Productivity Commission noted private sector surveys by comparison websites, consultants and mortgage providers, resulting in small sample-based estimates of total lending from parents of around $35 to $92 billion.

The estimated range would place BOMD somewhere between the fifth and ninth-largest home lender, when compared to total book values across providers.

But, the commission stated that it could not find “strong evidence of large transfers from the Bank of Mum and Dad (gifts or guarantees from parents that help their children buy a house) despite popular belief”.

Despite inheritances and gifts more than doubling since 2002 and being projected to rise fourfold between now and 2050, the median gift parents gave to their children (of all ages) was found to be around $1,000.

In 2018-19, the total value of gifts from parents to children was around $12 billion, with the number of recipients increasing from around 750,000 people in 2000-01 to 1.5 million in 2018-19.

Average recipients for gifts were around 20 years of age, at the beginning of their career, yet to start a family or purchase a home, and they tended to receive around $8,000.

Information provided to the commission by CBA and Westpac, which have a combined 50 per cent total mortgage market share, showed home loans assisted by parental guarantees accounted for less than 5 per cent of total settled loans per 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.

Taking the 3.5 per cent weighted average across CBA and Westpac, the commission calculated that if the same proportion of loans in Australia were guaranteed and the average guarantee would be worth 20 per cent of the loan, then the total value of guarantees would be about $13 billion (based on aggregate housing and investor loans outstanding in September 2021).

Meanwhile, more than $120 billion in wealth was transferred in 2018, with the aggregate annual value of wealth transfers more than doubling in real terms since 2002.

Slightly less than $1.5 trillion has been transferred since 2002.

More than inheritances, asset price growth, particularly for housing, had a much greater impact on wealth inequality.

Productivity Commissioner Lisa Gropp noted inherited wealth only contributes around a third to the persistence of intergenerational wealth – with the rest coming from other things parents give to their children, including education, networks, values and other opportunities.

“By the time people receive inheritances, they’ll usually be well into middle age – about 50 years old on average. This limits the impact inheritances have on opening up lifetime choices and opportunities about career and family,” Ms Gropp said.

“Gifts on the other hand, tend to be much smaller and flow to younger people just starting out in life.”

Close to 90 per cent of transferred wealth (around $100 billion in 2018) was in the form of inheritances, passed on following death.

Around half of all inheritances went to the children of the deceased. Most of the remainder went to a surviving spouse or to other family and friends, while around 2 per cent went to charity.

Although wealth transfers are projected to increase absolute wealth inequality, the commission noted fewer wealthy people tend to receive transfers that are a larger share of their existing wealth.

“Wealthier people receive more inheritances and gifts on a dollar-for-dollar basis but less as a percentage of their existing wealth,” Productivity Commissioner Catherine 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.

“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.”

[Related: Frydenberg promises to press RBA, APRA on housing]