Children of homeowners twice as likely to get a foot on the housing ladder

It’s been well reported that homeownership rates among young people have dropped dramatically over recent decades. But new research has shown that the decline is much more significant among those whose parents don’t own their own home.

The study by the Institute of Fiscal Studies (IFS) found the homeownership rate for those aged 25-39 fell from 55% to 43% between 2009 and 2019.

But in this age group, children of homeowners are over twice as likely to get a foot on the housing ladder as the children of renters.

Between 2009 and 2019, the homeownership rate for the children of homeowners fell from 60% to 51%. For the children of renters, it fell from 40% to 22%.

Help from parents

So how can you explain this difference? The report uncovered some interesting facts about the financial help first-time buyers were getting from family.

It found nearly half of first-time buyers in their 20s received financial help, usually from parents, to buy a home.

The amount of financial help averaged at around £25,000.

However, the amount they received varied dramatically depending on the background of their parents.

Over half of those with university-educated, homeowning parents received financial help to get on the housing ladder. The average amount they received was £35,000.

In comparison, 29% of those with renting parents received help. The average amount they received was £11,000.

North-South divide

There were significant differences in the help received around the UK too.

The average amount gifted to those in South East was £31,000, in the Midlands it was £18,000 and in the North it was £17,000.

Those in the South East were around twice as likely to be able to afford a property without financial help, compared to those in the North.

Not all help strictly necessary

The IFS research found not all the help provided by families was strictly necessary to help their loved ones get onto the housing ladder.

About a quarter of first-time buyers who received a financial transfer at the time of their home purchase could have afforded to buy the property without the additional money – in that their savings that would cover a 10% deposit, and the rest of their savings plus a mortgage of 4.5 times their income would cover the value of the property they were buying.

Deposit difficulties

For almost two thirds of first-time buyers, every £1,000 they receive in help increases the value of the house they can buy by £10,000. This is because getting together a 10% deposit is what gets in the way of them buying rather than their ability to cover mortgage costs.

For those struggling to buy, 29% of those in the North are constrained by the deposit requirement compared to just 9% of renters in the South. This is because those in the North have higher incomes in relation to local house prices and so can more easily cover mortgage costs.

Widening wealth gap

The IFS research also revealed financial help given to children to buy property is potentially widening the wealth gap. This is, in part at least, due to the way the financial support is being used.

The study found those who receive bigger lump sums tend to use the extra towards the deposit rather than getting a more expensive house. Each additional pound received typically results in buyers putting an extra 77p down as a deposit.

Increasing deposit size can reduce the interest rate paid on a mortgage.

Using £25,000 to put down a 25% rather than 10% deposit would reduce the repayments on a typical five-year fixed-rate mortgage taken out in 2018 by £8,500. This compares to a return of around £850 if you put that money in a typical cash ISA.

As a result, those who get a significant lump sum from their parents are in a better position to build up their wealth – widening the differences between those who receive more and those who receive less.