The housing market is perhaps the most important channel that ensures that children of wealthy parents become wealthy themselves. This is the conclusion of a working paper published by Norges Bank.
Researchers Ella Getz-Wold, Knut Ari Astveit, Erik Elands Brandsas, Ragnar Inger Gelsrud, and Gisel James Natvik of BI, Norges Bank, and the Federal Reserve have come to the conclusion that an individual's ability to buy one's own home explains just as much of the differences in wealth. Between the children of the wealthy and the children of others, like all other factors combined.
In the study, based on equivalent data for 3.4 million Norwegians, the average net financial wealth among the “rich” is $60,000 per person. Parents. In the second group, the average is $6,000.
The difference in wealth between the children is large, but not the same. Children of wealthy parents in their mid-40s have twice the net financial wealth of others. They also have a $5,000 higher average annual income.
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-We have documented significant gaps in housing outcomes based on parental wealth, write Professor Geisel James Natvik and co-authors. Image: B
Buy and borrow
Among the children of wealthy parents, 52% had bought their own home by age 30, compared to 41% in the other group.
The difference – 11 percentage points, or 35 percent – is due to the fact that they receive direct help from their parents, so they can borrow more than their income indicates, something that has become more important as restrictions tighten. loan regulations, and/or they are purchasing housing at a price well below market rate from their parents.
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Wealthy parents are 60 percent more likely to buy the home part-way with their children, and 10 percent more likely to sell their home to their children, practically at a discount of about 25 percent. Compared to the market price.
On average, children of wealthy parents buy homes that are 15% more expensive than their other peers. They achieve this, among other things, by obtaining higher home equity loans. Children of wealthy parents, on average, take out loans 10 percent higher than other children who have bought a home.
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40% of first-time buyers receive help from their parents in some form. Here from a residential construction project in Lillestrom.. Photo: Haakon Mosvold-Larsen/NTB
– A particularly attractive channel
“The housing market is emerging as a particularly attractive channel for parental support,” as home support makes buying a home possible, and in that it has paid off over time to borrow to buy a more expensive home. According to the note, up to 40 percent of first-time buyers are likely receiving help from their parents in one form or another.
The researchers show how a US$100 investment in the stock market in the early 1990s rose to US$4,600 25 years later, while a similar investment in the housing market rose to US$6,000.
Here, 100 percent financing is assumed for the stock purchase and 90 percent financing for the home purchase. But the buyer is also supposed to keep the same home for the entire period. Alternatively, if the home is replaced periodically with a progressively more expensive home, the gain is greater.
This article was first published in FinanceAffairs.com.
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