More information on the variables

The direct financial transfer measures were constructed as a categorical variable (nominal values). It includes any inheritance greater than £1,000 and cash gifts or loans greater than £500 in the prior four years in the household. The information is derived from a combination of continuous and categorical variables as respondents are first asked to provide a figure before being asked to select an appropriate category. For banded figures, the median value is used to sum all recorded transfers within a household, which is then banded into a categorical variable. The amount reported for the first wave was not used due to a large number of missing values.

The financial wealth variable is constructed by adding all the values of current and savings accounts, investments, such as shares and bonds, and an endowment, less any non-mortgage debt or loans. Only the amount received from family or friends reported in the second and third waves (2010/12) is included due to incomplete information in the first wave.

In terms of the base age, 19 is used instead of 18 years of age. As previously mentioned this is due to the parental homeownership information being collected only for those aged 25 or over. The oldest person in the sample in 2008/10 was 44 years old, who would be 50 years old in 2014/16, which makes the total duration 32 years (50-19+1). 40-44 and 45-50 were combined to secure a sufficient number of observations in this category. The interval width does not need to be evenly spaced. Each observation is considered as an independent observation with a binary outcome (Guo, 1993; Jenkins, 1995).

4.10 Appendix to Chapter 4 143

4.10.3

‘Bank of Mum and Dad’

The term Bank of mum and dad (BOMAD) is frequently used by British mortgage lenders, which indicates the increase prevalence of such transactions (e.g. HSBC, 2014; Legal & General, 2016; Old Mutual, 2017). Some of the major lenders now offer mortgages that are secured by parents’ cash savings or home equity that is equivalent to the deposit amount. This industry trend highlights the fact that parental wealth has become one of the important determinants in accessing capital in Britain.

As of April 2019, Lloyds Banking Group, Nationwide Building Society and Barclays offer mortgage products to first-time buyers by securing the loan against their parents’ assets. These products are called ‘Lend a Hand Mortgage’, ‘Family Deposit Mortgage’ and ‘Family Springboard Mortgage’, respectively. Lend a Hand Mortgage and Family Springboard Mortgage offer interest-bearing accounts for the parents to deposit cash savings equivalent to 10% of their adult children’s mortgage loan for three years, with no access to the savings account. Mortgages can be obtained up 100% Loan-to-Value (LTV) ratio, which is the proportion of the remaining sum of the mortgage compared to the value of a home.

Nationwide Building Society provides an additional mortgage to parents who are its existing clients, a proportion of which can be transferred as a deposit for a family member, although the LTV is subject to the type of the building (houseflat and newly built/ previ- ously lived). A smaller lender, Metro Bank, does not offer these products does offer joint borrower/sole proprietor mortgage products that allows adult children to borrow based on parents’ borrowing power but be listed as the sole owner of the property.

While the rise of BOMAD may present a new business opportunity for the financial sector, it has a substantial social cost of inequality. A columnist at the Guardian, Rhianonn Lucy Cosslett, reflects on the rising importance of BOMAD and inequality and describes the essence of the problem well:

"But this source of funds is available to only a fortunate few. My own parents, for example, don’t have £21,600 to give me, not that I would ask. My mum is on a low wage and in rented accommodation, and my dad and stepmum work part-time due to ill

4.10 Appendix to Chapter 4 144

health. I’m 30, newly married and live in a shared house. For the last couple of years, my husband and I have been saving hard, and I’m proud of how much we’ve put aside, but the price of rent, coupled with unstable employment, means that owning – even outside London – still seems a long way off." - Rhiannon Lucy Cosslett, an excerpt from her column on 11th Nov 2017, the Guardian.

Chapter 5

Wealth accumulation patterns among the

younger adults

5.1

Abstract

This chapter examines how Britain’s younger generation accumulates wealth by developing a typology of savers. It proposes a Balance Sheet approach, which enables reorganising wealth data into more nuanced categories of wealth-building vehicles. Factor Mixture Modelling is performed to establish the saver types, based on the reorganised individual balance sheet data using the Wealth and Assets Survey. Four distinct saver types are established: undersavers, property saver-dissavers, traditional savers and investor savers. Transitions between saver types are studied using Latent Transition Analysis. These saver types provide insight into perceptions and utilisation of wealth accumulation channels. While the transition probabilities are mostly stable, the patterns of upwards and downwards transitions vary by parental homeownership. People with a higher individual and parental socio-economic characteristics are more likely to be allocated to saver types with more wealth. The chapter’s findings have important long-term policy implications for the younger generation’s future economic well-being.

5.2 Introduction 146

5.2

Introduction

In Britain, the baby boomer generation has accumulated substantial wealth over its life course due to the favourable economic conditions and policy structure (Banks et al., 2005; Bastagli and Hills, 2013; Crawford, 2018a,b; Hood and Joyce, 2013). This generation accumulated housing wealth as more became homeowners since the early 1980s, who benefited substan- tially from the housing price boom in the mid-1990 (Bastagli and Hills, 2013). Many earned considerable Defined Benefit (DB) pension entitlements, which facilitated an early retirement for some (Crawford and O’Dea, 2012).

The prospect of wealth accumulation for Britain’s younger generation, however, is less optimistic. The younger generation, aged between 25 and 49, live in different economic, political and policy conditions from those experienced by previous cohorts at the time of their early adulthood (Corlett, 2017; Hood and Joyce, 2013). Earnings have stalled while living costs have increased. This combination of which undermines their ability to save (Clarke et al., 2016; Corlett et al., 2016). It has become far more challenging to own a home (Corlett, 2017) and the ability to do so appear to be highly related to socio-economic background (Coulter, 2018) and family financial support (See Chapter 4). Changes in pension policy also paint a less favourable picture. Recent developments in the pension policy imply that the younger generation is saving with a higher level of risk as the vehicles that helped the previous generation build substantial private pension wealth can no longer be relied upon (Cribb and Emmerson, 2016; PC, 2004). Due to greater uncertainty, the role of wealth in supporting retirement for this generation is expected to increase.

Despite its importance, studies on young adults’ approaches to wealth building are scarce. Wealth building involves saving and investment decision-making, and individuals perceive risk and return structures differently. Also, the cumulative nature of wealth means that the outcomes during the early stages of adulthood can have long-term consequences. Moreover, the early stages of adulthood are a time of increased involvement in organising one’s finances. Therefore, understanding the wealth-building patterns of younger adults today can also inform our understanding of their future saving tendencies. Therefore, this study raises the question: how does the younger generation in Britain approach wealth building?

5.2 Introduction 147

To answer this question, this study establishes saver types among individuals aged between 25 and 49 as of 2010/12. It utilises three waves of the WAS from 2010/12 to 2014/16 (ONS, 2018d). It develops a balance sheet approach; it reorganises wealth data according to type (financial, housing or pension), ownership status (asset or debt), ease of access (liquidity and restrictions) and amount. This reorganisation enables information about perceptions and utilisation of wealth-building channels to be distilled. Saver types are established cross-sectionally first using factor mixture modelling (FMM). Gross figures are used for assets and debt, which give rise to the issue of having many zero values. As zeros in this study are meaningful, a two-part approach is taken in this study. This approach dissects the data into the binary and the continuous parts in modelling so that the no information loss occurs (Kim and Muthén, 2009). The movement between saver types over time is studied using latent transition analysis (LTA). The transition probabilities are examined with respect to individual as well as parental socio-economic status.

Four saver types are established: undersavers, property saver-dissaver, traditional savers and investor savers. The results show that the younger generation’s wealth-building pattern follows that of the previous generation, utilising low-risk investment vehicles, such as cash savings and homeownership (Hills, 1995; Keister and Moller, 2000). Housing wealth in particular accounts for a large proportion of wealth. In the long run, there are two implications for this: a) wealth outcomes are mainly subject to the macroeconomic conditions and b) issues related to housing asset accumulation (homeownership) and decumulation (funding retirement and care) may continue to be politically sensitive. The changes in saver type membership over time are found to be mostly stable. However, individuals with high socio- economic status and those from better-off family backgrounds are more likely to be in saver types with a higher level of wealth when first observed in 2010/12. Furthermore, individuals who grew up in an owner-occupation household are more likely to transition upwards than those who did not. This difference points to intensifying within-generation inequality due to the intergenerational links in economic outcomes.

This chapter is structured as follows. It first argues the importance of studying wealth accumulation from the individuals’ perspective. The following section explains the motivation