Monday, 28 May 2018

Economic Myths: "Younger generations to pocket £1trn of inheritance in next decade"

Prompted by @henrypryor, commenting on the headline that "Bank of Mum and Dad is ninth-biggest lender with £6.5bn loans":

The madness continues - 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 but where the victims are your children.

The flip-side is nonsense like this:

Rising wealth and higher mortality rates will help raise the total value of inheritances to £1 trn over the next decade, according to a leading think tank...

A report by the think tank and estate administrators Kings Court Trust found that the 66% increase in intergeneration wealth transfers will be heavily driven by the rise in property prices over the next decade. Over the past 20 years, house prices have risen by 273%.

The next generation, will collectively, inherit pretty much nothing overall.

The point is that rising house prices make home-owners appear/feel wealthier but also make today's would be owner-occupiers actually a lot poorer.

Think about it.

If house prices halved to something sensible, like their long run range of between three and four times earnings, every would-be owner-occupier couple would be £150,000 - £200,000 better off as a result, today, right now, whether their parents are poor or wealthy, owner-occupiers or tenants. And parents wouldn't need to worry about 'helping their children onto the property ladder'.

For sure, there will be a few lucky people who inherit a Buy-to-let portfolio and no longer need to contribute to wealth creation (i.e. go to work), but on average, people will inherit a fraction of a house when they are in their forties, enough for a decent deposit, but still leaving them hugely out of pocket overall. They will have been paying rent for decades and they will still need to take out a large mortgage that will take them until retirement to pay off.

Ergo, if something makes the next generation worse off overall, how can they be said to be 'inheriting' such colossal sums every year? The net result is that a minority will become ever wealthier and the majority will be poorer.
In case anybody is wondering why I hadn't posted anything for a week, it is because I was embroiled in 'GDPR compliance' most of last week, which means basically 'tidying up and filing every single bit of paper on your desk'. I had a bit of a backlog and there were about three-thousand of them, not that I counted but the pile was about ten inches high. This turned my brain to mush and the lovely weather doesn't help :-)


formertory said...

Well said, Henry Pryor.

It's difficult for parents to lend the money to their kids. The kids (if they maintain it's their own money) are supposed to have to prove they've had the funds for an extended period, and if they didn't build up themselves, where the lump sum came from. If it was parents / relatives, it can't be a loan; there are binding declarations to sign that it's a non-repayable gift.

So then we come to the distinct possibility of some of the kids - especially in the south-east and other expensive areas - getting IHT demands where parents pop their clogs too close to the date of the gift..... that'll get people exercised. I wonder how much of the money comes from Equity Release of widowed old mum's house?

Mark Wadsworth said...

FT, exactly. It gets worse the more you think it all through.

James Higham said...

Disappointed - not one word about how much their houses cost.

Lola said...

Re GDP Aaaarrrgghhh. Me/us too.

Lola said...

FWIW we have had enquiries from a number of people wanting to use ER to help their children buy houses. We have (a) explained the madness and (b) walked away. I want no part of it.

Mark Wadsworth said...

JH, exactly.

L, first comment, I know it's a first world problem, but it will achieve nothing, as we both well know.

Second comment, this doesn't make any sense, does it? Parents and grandparents take out a loan they can no longer afford to pay off, to give their kids/grandkids a deposit to enable them to take out an even bigger loan, which they can't pay off, ad infinitum?

Lola said...

MW. It's debt slavery. The New Feudalism.

Bayard said...

L, indeed. An indebted workforce is a compliant workforce.

ontheotherhand said...

I sometimes look at Japan who entered the phenomenon of permanently low interest rates before all of us. Play with the graphs here to compare countries One thing that I remember reading about Japan is that they had 90 year mortgages that could be inherited. Searching for that now, I read that Sweden has 140 year mortgages (which is a rounding error away from perpetual). I wonder if the UK will dabble in extending the mortgage terms to 60,90, infinity, to keep the whole thing going?
Hmmm. Mathematically, are 90 year inheritable mortgages the same thing as BoMaD equity withdrawal?

Mark Wadsworth said...

L, B, yes, that is one of the aims of Home-Owner-Ism, those who have paid off a mortgage are sado-masochists telling the next generation "Yes it's tough but we got through it." like it's some sort of macho test. Why not try to people's lives easier rather than making suffer to teach them an entirely unnecessary lesson?

OTOH "Mathematically, are 90 year inheritable mortgages the same thing as BoMaD equity withdrawal?"

They come to the same sort of thing, don't they?

Bayard said...

"Why not try to people's lives easier rather than making suffer to teach them an entirely unnecessary lesson?"

Because that's not the British Way. The British Way is to give the "new boys" (and girls) hell and they will pass on to the next lot of newbies when they are "old hands".