Government support for homeownership through schemes such as Help to Buy has led to mortgages being favoured over other forms of long-term savings and investment, researchers have found.
This drive towards Brits’ tying up their money in housing has had a knock-on effect on the amount people can save into their pensions, and for the UK economy as a whole, according to a study commissioned by the Association of British Insurers (ABI).
Using data from the British Household Panel Survey covering 10,000 individuals each year between 1991-2012, researchers from think tank the National Institute of Economic and Social Research (NIESR) analysed how much households with a mortgage saved and found that the drop in the amount they saved translated into a 15% lower private pension income when they retired.
It points out that at the start of 2017, the value of the UK’s housing stock went up to a record £6.8 trillion, worth 3.7 times GDP (gross domestic product), compared to 1.6 times GDP in 2001. Residential property accounted for more than 60% of the net wealth in the UK economy.
Meanwhile, the UK has the lowest rate of business investment and one of the lowest labour productivity rates of the OECD (Organisation for Economic Co-operation and Development) advanced economies. The UK’s stock of private pension savings is 97.4% of GDP – significantly lower than the average of 123.6% of GDP across OECD countries.
Researchers also looked at how the UK would benefit if the balance between business investment and housing were to follow other OECD advanced countries more closely, with business investment increasing from 66% to 80% by 2028.
They found that with total private investment held constant, productivity would go up by 2.3% and GDP by £55 billion in 2028, with an additional 160,000 jobs created.
A second scenario considered total private investment rising from 14.2% to 16.8% in 2028 – again, more akin to other advanced economies. Researchers calculated that UK productivity would be 3.8% higher, GDP would be up by £90 billion and an extra 220,000 jobs would be generated.
‘As important as a home is, it can’t replace retirement savings’
Dr Monique Ebell, NIESR’s associate research director who co-authored the report, says: “This research helps us to understand how much UK households’ over-reliance 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.”
Yvonne Braun, ABI director of policy, long-term savings, adds: “It 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.”