Finance, housing and the ageing population

Alex Marsh, Professor of Public Policy at the School for Policy Studies urges a systematic, urgent, and holistic approach to thinking through issues related to housing, care, and ageingAlex Marsh

When we think about the financial aspects of housing, care and ageing it is essential to approach the issues holistically and to embed our understanding of the housing system in broader developments across a range of policy areas. These include developments in education policy affecting student debt levels, responses to changes in the labour market, pensions policy, social security policy, and broader macroeconomy policy. Earlier this year, for example, the FT reported on some ECB analysis arguing that Eurozone quantitative easing was responsible for fueling housing market bubbles in a number of countries (paywall), including the UK.

Policy in all these areas — and more — is reflected in the way in which the housing market behaves. And the way in which the housing market behaves is, in turn, reflected back into these other policy areas. Holding on to these interconnections is crucial.

Some would argue that the UK housing system is fundamentally broken. Others wouldn’t want to go quite that far. But many would agree that the system is decidedly unwell. The recent Foresight report by Michael Edwards rightly argues that we need to recognize that the problems are multidimensional and the solution therefore needs to be multi-faceted. We face acute short-term p
roblems triggered by the Global Financial Crisis (GFC) layered on top of long-term problems generated by the unique combination of characteristics of UK housing market and Westminster housing policy.

After nearly a century of growth in owner occupation the UK housing market turned a corner in 2003 when the proportion of owner occupiers started to decline. This decline was already underway by the time the GFC arrived. But it was given further momentum by the credit market seizure and subsequent tightening of lending criteria, including as a consequence of the Coalition government’s Mortgage Market Review.

Over the last decade we have witnessed an extraordinary — indeed unprecedented — rapid tenure transformation. The decline in owner occupation — specifically mortgaged owner occupation — has been mirrored by sharp growth in private renting.

The question is: will this transformation continue?

It could be argued that new uncertainty has been injected into this question by the recent budget. The Chancellor reformed the structure of Buy to Let tax relief in a way that may take some of the momentum out of the market. Restrictions on local housing allowances and tax credits could, in principle, work in the same direction by reducing effective demand. On the other hand, the Government continues its drive to encourage greater involvement by institutional investors in the private rented sector. With investors continuing to search for yield, and returns to other low risk assets relatively poor, the supply of funds to private renting may well continue. At the same time, older people now have more discretion over the use of their pension savings and some of it is likely to find its way into property investment.

It is equally important to recognise that the decline in owner occupation and the rise of private renting is not a phenomenon peculiar to the UK. We see similar trends in other developed countries, including Japan, Australia and the US. That suggests the drivers lie beyond the vagaries of domestic fiscal and monetary policy.

The rise in house prices over the 2000s led to the emergence of the argument that asset-based welfare could be a substitute for the post-war welfare state. If households have substantial amounts of housing equity at their disposal, and that equity can be made fungible, then it opens up the opportunity for self-financing care. Increasing longevity and changing dependency ratios would appear to make this all the more urgent. If households are able to extract equity from their owner occupied home in order to pay for care in older age then that could be the cue for the state to step back and the burden on taxpayers to be lifted.

The immediate challenge with respect to asset-based welfare is the substantial intra-generational differences in access to housing wealth.

Asset-based welfare policy may make sense in London and the South East where house prices have risen the most and older households are sitting on substantial amounts of equity. But in other regions, where price inflation has been less dramatic, the amounts that can be released for other uses are not always sufficient to meet the costs of care, except in the short-term.

We also need to recognise that while policy makes reference to “asset rich and income poor” older people — and such households surely exist — income and wealth tend to be correlated. Much house price growth has affected properties owned by those in the 50–64 year age group. At the same time, we need to recall that we shouldn’t focus exclusively on growth in house prices. In terms of net wealth households can find themselves in sharply divergent positions. It has been estimated, by Beverley Searle, that English households headed by someone in the 50–64 year age group held net wealth anywhere between -£280,000 and more than £1 million in 2011.

The policy emphasis upon asset-based welfare could have unfortunate side effects, particularly in a context where the amount households will need to contribute to their own long-term care is uncertain. Here it is unfortunate that the reforms in the Care Act 2014 have now been postponed until 2020. The means uncertainty is prolonged.

A key potential side effect is that it gives home owners a strong incentive to maintain the value of their assets, in case they are required to draw down the equity to pay for care. This is part, but by no means all, of the story in accounting for the NIMBY phenomenon of local resistance to new housing development.

The undersupply of new properties contributes to ongoing affordability problems. This has led to the observation that, if you think about the issue holistically, the implications of the post-war welfare state and asset-based welfare strategies are de facto rather similar from the point of view of younger cohorts. Under the welfare state model an ageing population would lead to an increase in the tax burden being borne by younger people. Under the asset-based welfare model an ageing population leads to younger people having to pay much more to access adequate housing. Rather than the money flowing via the state, the latter represents a more direct transfer from younger to older households.

There are a range of further questions about asset-based welfare policy. For example, relying on older people to trade down from family housing to smaller properties in order to release sufficient equity to pay for care rests on the assumptions that younger households are both sufficiently numerous and sufficiently well-resourced to meet the asking prices. Neither assumption can be made with great confidence across all regions and over time.

And among the current cohort of older households the willingness to deccumulate wealth in older age is less evident than the advocates of asset-based welfare would have hoped and anticipated. This is no doubt in part because of concerns about poor value for money and mis-selling of financial products. It is also about high material and psychic transaction costs. But it is also arguably about home ownership as a social and political project, rather than just an asset to be accumulated and then ‘spent’. Research suggests that having ‘achieved’ the aspirational status of outright ownership households are reluctant to relinquish it. To do so could be seen as signalling failure.

It may be that younger cohorts of households may position themselves differently in relation to their assets. They may be more willing to “spend the house”. But, first, they are less likely to have the assets in the first place and, second, precisely because they have a different attitude to their assets they might well have spent their equity before they arrive in retirement.

We are witnessing a drop in home ownership rates across age cohorts. In part this is because households are already carrying debt and in part it is because they struggle to meet lenders’ deposit requirements. As a consequence households are entering mortgaged home ownership later, if at all. The high cost of private renting in many local markets makes it difficult to save. Assistance from the ‘bank of mum and dad’ to ease access to owner occupation becomes increasing important. This inevitably perpetuates social inequality. In addition, later entry to owner occupation leaves households a shorter time to accumulate assets before retirement.

It is not unreasonable to anticipate that in future a higher proportion of households will arrive in retirement without any housing equity to draw on to fund other expenditures in older age. It has been suggested that by the time we reach 2030 a majority of households will be arriving in retirement with no assets at all. In addition, because fewer households will have become outright owners before retiring more will being carrying the cost of a mortgage or rent payments into retirement. For those able to draw on private pension income this will not necessarily be problematic. But for other households income in retirement will drop and they will not have the resources to meet their housing costs in either the short or the long term. It is likely that there will be a substantial revenue cost for the state, if we are to ensure older people are to be able to live in adequate housing conditions in retirement.

In the light of the overarching goal of fiscal consolidation, policy may still be wrestling with how to make asset-based welfare work. But my sense is that the academic debate is now tending to move to thinking about “after” asset-based welfare. The ABW model has been exposed as an inadequate alternative to a conventional welfare state. It can be made to work for only a fortunate minority.

But identifying what might replace the asset-based welfare model is an ongoing conversation. And it’s a conversation that requires us to retain a systemic perspective and a sense of urgency. This is a complex issue and it isn’t going away.

This piece was originally posted at, and is available via Alex’s blog.

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