Owning a house has three important economic aspects. First and foremost, it is a place to live. Housing is a consumption good. Unlike owning shares, owner-occupiers derive direct benefit from the house they own. It is a place to sleep at night. A place to be safe. A place to write book chapters.
Housing is also an investment and in many cases a very profitable one. That said, unless you are going to sell the house you live in, owner-occupation is a hopeless investment in that you cannot easily realise your gains. From my window, I can see five houses, each with four or five bedrooms, and worth around £1 million. Each is lived in by a pensioner or a pensioner couple. They could downsize and realise a large financial gain but do not. These houses have memories of happy marriages and children growing up. They are the embodiment of lives well-lived – and therefore investments only to the next generation. By and large, a house is only valuable as an investment for the pensioner if they need to move into a care home: a London house buys a lot of care.
Finally, owner-occupation is a hedge against house prices rising. For sure, mortgage rates can change, but the purchase price is fixed from the moment you exchange contracts. Most people need one house to live in, no more and no less. Buying one house, therefore, is a perfect hedge against future house price inflation.
As well as the three direct economic aspects, owning your own house gives independence. This is particularly important in retirement, when you would not want a landlord evicting you because you wish to live in the property, or because the rent has risen to a level you cannot afford.
Conversely, private renters face many risks in retirement, especially as they age. They face the risk that their rent will rise – forcing them to move house at an age when that is difficult. They face the risk that their landlord will evict them. Even if the government acts on its longstanding and much-delayed promise to ban no-fault evictions, people can still be evicted if the landlord wants to sell the property or live in it themselves.
Furthermore, people in retirement often need modifications to their homes. These might be small things, such as installing handrails by the front door, or larger projects, such as a walk-in bath, a wet room or a downstairs bathroom. Negotiating these with a landlord will not always be easy, and the tenant – who does not want to move – will do so from a position of weakness. Renting in retirement has one more major downside: you must pay rent. A small one-bedroom flat where I live in Surbiton costs around £1,300 a month – so you need an additional gross pension of £19,500 a year to cover the rent alone. That is a lot. Poverty for private renters in retirement in the South East is going to be the norm.
The number of pensioners living in private rented housing is on course to double in the next few years. Given a 20-year retirement life expectancy, there is a very real prospect that rising rents will force many pensioners into a precarious position, relying on children to pay their rent, or forcing them to move long distances to find a place they can afford. Another way to look at it is to think of the pension pot you would need to maintain living standards. According to the insurer Royal London, someone who owns their home outright needs a pension pot of £260,000, while someone who rents privately needs almost double this, at about £445,000.
Meanwhile, a majority of owner-occupier retirees have paid off their mortgages. Indeed, over three-quarters of pensioners own their homes outright. For sure, there are some costs – the annual boiler service, for example – but these are much smaller than the costs of paying rent.
Let us turn now to think about the effects of falling house prices. The main thing to note is that a bit of a fall will make very little difference to any retired person. Whether the average house in London is worth £500,000 or £600,000 does not matter. Either is enough to pay for care except in the most exceptional circumstances.
Let us think instead about what would happen if house prices across the UK were far more affordable. Imagine that house prices were half their current averages. That would mean that a small Victorian terraced house was £125,000, a suburban semi £150,000 and most detached houses cost £250,000. This would have the following effects. These prices are already typical in the North East, and although it is not possible or desirable to halve house prices inthe short run, a period of nominal price stability so that real prices fall would be welcome. If that were to happen, we would see the following effects.
First, and most importantly, far more people would own their house by the time they retired. Owner occupation among workingage people has fallen substantially since the early 1990s, coinciding with the rise in prices. We know that people overwhelmingly want to own their own house, but that many are priced out by current levels of house prices. Lower house prices mean that far more people would have wealth in retirement because they would own their own house. They would no longer need to assign £19,500 of their pension just to cover the rent because they would own their property outright.
Second, because houses are cheaper to buy, people will have accessed wealth earlier. They will be able to get on the property ladder at an earlier age, they will pay less in mortgage repayments while they are young and they will pay off the mortgage earlier. What they do with this extra money cannot be predicted with any certainty. In all probability, they will spend some and save some. Saving more means that they will enter retirement with more money in their pension and in other forms of savings. Indeed, one of the many reasons that so many people have so little pension provision is the cost of housing. We have a double pension time bomb – low pensions, large rent. In short, they will have more assets and lower outgoings than in the high house price alternative.
Third, the evidence from the US and UK is that high house prices deter people from having as many children as they would otherwise have. One effect of lower house prices is that people will have more ‘human family wealth’, that is, more children who may well provide some caring and companionship for them in their dotage. That too is a form of wealth.
Fourth, more owner-occupiers means fewer retirees in need of housing benefit. There are over one million pensioner households on housing benefits. This number is not currently rising, because those young enough to be hit by high house prices have not reached retirement age, but it will. It is plausible that significant action now to increase housing supply will, in due course, reduce the pensioner housing benefit bill by £10 billion from levels it would otherwise reach. Remember, no government is going to allow mass evictions of pensioners from the private rented sector, caused by an inability to pay. Saving the government billions means that there is more money to be spent on the one thing that high house prices do help with – paying for adult social care. In the context of social care, a reduction in house prices is, therefore, not the destruction of wealth or assets, it is a reallocation.
Fifth, lower house prices means fewer housing assets that can be used to pay for care for those who would own a house even in the high housing cost scenario. At present, if you go into a care home, the value of your house may well be used to cover the costs of your care. Lower house prices means less money will be available from that source to cover these costs.
Lower house prices would, however, change the best way for government to approach care as a policy. With lower monthly bills for mortgages and rents for people of working age, the government could more easily extend national insurance to cover care costs, with less of a chance of political backlash. That could either be a pay-as-you-go scheme, like the state pension, or an asset-backed individualised approach, akin to defined contribution pensions, with an insurance option available on retirement. Something akin to the Dilnot Report – suggesting a cap on individual care contributions with government covering the costs above the cap – which has surely been kicked into the long grass at present, or a more comprehensive system could then be afforded. With lower mortgages – and probably an earlier date of purchase – people will have more time in middle age to save for retirement, including saving for care. Those savings will be cash or other reasonably liquid investments, rather than in housing, which makes paying for care easier.
Finally, if lower housing costs have been achieved through liberalising the planning system, the cost of a care home place in areas where care homes themselves are currently expensive will fall, simply because it will be cheaper to buy or rent the care home. The huge variation in care home costs around the country can largely be explained by differences in housing costs, rather than differences in wages.
Meaningfully lower house prices will therefore affect wealth in retirement in the following ways. Above all, they will increase the number of people with wealth in retirement, because they will increase the number of owner-occupiers. Further, lower mortgage and rental costs earlier in life will increase people’s ability to save via financial instruments such as pensions and ISAs, rather than being overly invested in owner-occupied property. That gives them more freedom and more choice in retirement. Finally, it would change the way that government should approach paying for care homes for the elderly. Rather than expect the cost to be covered by housing assets, it should be covered by financial savings or government. With lower mortgage and rental costs earlier in life, people would be in a stronger position to cover these costs.
Tim Leunig is a former Economic Adviser to two Chancellors, as well as Senior Policy Adviser to six other Cabinet ministers. He has also taught at the London School of Economics in the Department of Economic History and is a Director at Public First. Tim recently became the Chief Economist at Onward.
This essay was originally published in Bright Blue’s March 2024 essay collection, ‘A wealth of Opportunities: A centre-right prospectus for spreading wealth’.
