The rise of parental buyers

In his column for Switzer, John McGrath dsucsses the rise of ‘mums and dad’ buyers – buying property for their kids. 

Mums and dads buying property for their children are a growing force in Sydney, particularly in the inner city suburbs where property prices have become out of reach for most young people.

Parental buyers are typically competing against first and second home buyers and investors for apartments in suburbs close to the CBD and near universities such as UTS, the University of NSW and the University of Sydney.

Typical scenarios that our agents encounter include:

1. Parents buying a property as a gift for their adult child to live in immediately 
   
2. Parents buying for investment with the intention of letting their child live there for a period of time, usually during their university years; before resuming leasing to other tenants
3. Parents buying initially for investment while their child is still very young, with a view to gifting the property to their child when they’re old enough to leave home
4. Parents on more limited budgets are joining forces with their adult children and pooling funds to purchase a shared investment, with the child usually becoming the tenant

Parental buyers are typically Baby Boomers or Gen X’s who place a high value on owning their own home and building financial security through property, as they have done themselves. 

They want the same for their children but as property prices continue to rise during what has become a five-year boom, many parents are worried that their children will never be able to buy in Sydney on their own.

In January, Westpac released its Financial Future Report which surveyed1,593 Australians with children or grandchildren under the age of 12, as well as 50 prospective parents.

About 40% of respondents believed their children or grandchildren would not be able to afford to save the deposit for their first home, according to news reports.

Clearly, affordability is on parents’ minds.

Probably the bulk of parental buyers out there today are buying for children in their late teens who are close to finishing school.  

University or full time work is just around the corner and mum and dad want to give them a place to stay and potentially, a financial headstart by gifting them property.

But other parental buyers are even more forward thinking and are purchasing for children who are still in primary school, or even younger.

With interest rates so low, they see an opportunity to buy now and let a tenant pay the mortgage for them until their child is ready to leave the nest.

Among parental buyers are also mums and dads who are going guarantor on their child’s loan rather than buying the property themselves.

This usually involves putting their own home up as security.

Other parents are chipping in spare cash to fund the deposit on their child’s first home.

Buyers typically need a 20% deposit to avoid mortgage insurance and raising this sort of money can be very tough.

A 20% deposit on a median-priced Sydney apartment is currently $137,000 (based on a $685,000 median as reported in a March report by CoreLogic). 

That’s a lot of money for a young person on an average wage to save, so parents are increasingly stepping in to finance the deposit.

Sydney’s rising property prices are creating a Manhattan effect, with the inner ring increasingly becoming the exclusive domain of high income earners.

The only way for many Gen Y buyers to purchase in this area is with the help of mum and dad.

‘Parental buyers’ is a trend that perfectly demonstrates how the property market will always evolve when challenges arise.

Affordability has become a bigger issue than ever before in Sydney and mums and dads are, in many cases, doing something about it.