People’s desire to buy a home to get on or move up the housing ladder is hampering their long-term savings prospects, particularly when it comes to pensions, research claims.
Many see owning a home as a crucial part of their long-term investment plan, drawn in by prospects of cheap mortgage deals, zero capital gains tax on primary residences, increasing inheritance tax thresholds and, occasionally, subsidies to buy a home.
But, homeowners, and specifically those who buy a home with a mortgage, are increasingly viewing their home as a form of ‘pension asset’, at the expense of lower long-term savings in ‘real economy assets’, a report by the National Institute of Economic and Social Research claims.
Impact: Homeowners with a mortgage can expect their private pension income to be around 15 per cent or £390 lower a year than it should be, research suggests
The findings suggest that people who buy a home with a mortgage end up with lower private pension incomes than those who do not.
In total, homeowners with a mortgage can expect their private pension income to be around 15 per cent or £390 lower a year than it should be.
By the start of this year, the value of the UK’s housing stock soared to a record £6.8trillion, making it worth 3.7 times more than the country’s GDP. In 2001, housing stocks were worth 1.6 times more than GDP.
Homeowners aged 65 or over hold 43 per cent of equity in the housing market, compared to under 35s holding just 5 per cent, the research said.
Currently, forty per cent of households are headed by someone aged 30, compared with 60 per cent 25 years ago.
Dr Monique Ebell, NIESR’s Associate Research Director, who co-authored the report, said: ‘This research helps us to understand how much UK households’ overreliance on housing as a form of saving and investment is affecting their own income at retirement, and the UK economy as a whole.
‘Policy makers would do well to examine more closely the relationship between the UK’s long standing productivity weakness and incentives to invest in housing rather than productive assets.’
Although retired individuals who own their own house are statistically less likely to report financial difficulties than others, retired individuals who took up a mortgage at some point in life are around 5 per cent more likely to be in financial trouble at some point in their lives.
Changes over time: Currently, forty per cent of households are headed by someone aged 30, compared with 60 per cent 25 years ago
Why are you saving? Percentage of savers citing buying a home as their main reason for saving
Thinking ahead: Percentage of people by age group saving for retirement up to 2012
While an individual’s personal and retirement prospects can be impacted by the country’s ‘over-reliance’ on housing an an investment, so too can the broader economy, the research suggests.
The figures reveal that the UK has the lowest rate of business investment and labour productivity levels out of many advanced economies.
‘This may reflect that in order to buy houses, households might be cutting back on other forms of long-term saving and investment, or considering rising home values as a form of savings’, the report says.
The UK’s stock of private pension savings forms 97.4 per cent of GDP, compared to 123.6 per cent in other advanced economies.
Yvonne Braun, the ABI’s long-term savings director of policy, said: ‘This research clearly demonstrates the value of the long term savings industry.
‘The way savings in pensions are actively invested in businesses and the real economy is good for jobs, productivity and GDP growth. The research also raises questions about the impact the high cost of housing in the UK has on people’s ability to save for retirement.
‘As important as a home is, it can’t replace a retirement savings plan. More work and research in this area is vital so we can develop a more balanced and holistic approach to all forms of long-term savings.’
As part of his Budget announcement next week on Wednesday 22 November, Chancellor Philip Hammond is expected to bolster policies to boost homebuilding levels across the country.
Another policy to axe stamp duty for first time buyers is also not off the cards. The impact of such a move would vary from region to region, with those trying to buy a home in London potentially seeing the most benefit.
Policies: As part of his Budget announcement next week on Wednesday 22 November, Chancellor Philip Hammond is expected to bolster policies to boost homebuilding
Data: Percentage of individuals who made a contribution to a private pension from 1991 to 2012