One of the most overlooked assumptions in the UK pension system is the notion that people will reach retirement free of costly housing expenses, and with a tenure that allows them to live securely in their home as long as they need. https://t.co/em9LI9qmxV
— Henry Tapper (@henryhtapper) November 30, 2023
The PLSA retirement living standards do not include housing costs such as the cost of rental (or residual mortgage payments).
The problem is bad today and getting worse.
Graphic courtesy of Neil Walsh of Prospect Union
According to PPI analysis, if patterns of home ownership among today’s 45-64 year olds were to persist through to retirement and all other factors were to remain equal, by 2041:
• The proportion of households who own their own home in retirement could fall from 78% to 63%, the proportion
living in the private rental sector could rise from 6% to 17%, and the proportion in social housing would remain
unchanged.
• The number of households renting in retirement could rise to 3.6 million, of whom 1.7 million would live in the
private rented sector, around 1.2 million more than today.
For anyone familiar with the insecurity of tenure of private rentals, this presents more than a cashflow issue, it suggests that “generation rent” who we currently consider the robust younger workers, is likely to extend to older folk.
• Very few renters would have adequate savings to cover both the cost of renting and cost of living through later life. A couple aged 45-64 today on median income may need to double their total assets or more if they are to privately rent even a one-bedroom flat outside London through later life.
Of course , many of these renters will be paying rent out of a drawdown from a DC pot and not with the security of a wage in retirement. This is a double handful of worry.
• As many as 400,000 more households could become dependent upon income-related pensioner benefits, at a time when renewed concerns over the sustainability of the benefit system, including the freezing of the Local Housing Allowance, are prompting uncertainty over the extent to which the State might intervene to support people with living costs through later life.
Pension Credit (the door to more) is increasingly being gamified, this social media advert from Gov.UK shows that pensioners need to be on the ball.
The problem is very much one of resourcing to local authorities. The trend of local authorities to declare themselves bankrupt continues. This impecunity means many are having to find ways not to pay housing allowance.
• Rates of relative and absolute poverty among pensioners could rise by 2%, and an additional 170,000 households
outside London could be precluded from meeting minimum living standard targets in retirement, of whom more
than two thirds live on their own.
This despite a view that the boomers will be “ok”
• Although there is some geographic variation in the scale of the problems, trends towards higher levels of private
renting among households aged 45-64 are consistent across the country. The changes largely impact impact low to-middle-income households, those already at greatest risk of wealth inequality and poor retirement outcomes.
Making this a social calamity for decades to come.
Solutions and options for the long term need wages to catch up with house price increases over the last 50 years. When I bought my first house the house was 5 times my wage. My mortgage at 8% was 12% of my pay
If I was doing the same exercise in 2021 at a 3% mortgage rate I would need 40% of my pay.
Removing the link between mortgages and savings via building societies and banks entering he mortgage market has produce a significant divergence of house price and wage growth
In the short term the solution to move to a lower cost jurisdiction to retire locked in the gain adding to the retirement income capacity but what is the solution in the long term for the U.K. ?
A few thoughts
1. Increase Wages: The most direct way to make housing more affordable is to increase wages. This could be achieved through policies such as raising the minimum wage, promoting job growth in higher-paying industries, or implementing wage subsidies.
2. Control Housing Prices: Governments could implement policies to control the rise of housing prices. This could include increasing the supply of affordable housing, implementing rent controls, or introducing taxes on property speculation.
3. Improve Housing Supply: Increasing the supply of housing can help to reduce prices. This could be achieved through policies such as relaxing planning regulations, incentivizing property development, or directly investing in public housing.
4. Promote Regional Balance: Encouraging economic development and job growth in regions with lower housing costs can help to make housing more affordable. This could be achieved through policies such as regional development grants, infrastructure investment, or decentralization of public services.
5. Financial Regulation: Implementing stricter lending standards can help to prevent housing bubbles and keep prices in check. This could include measures such as tighter mortgage lending criteria, higher deposit requirements, or limits on foreign investment in residential property.
6. Tax Reform: Tax policies can be used to discourage property speculation and promote affordable housing. This could include measures such as capital gains tax on property sales, land value taxes, or tax incentives for affordable housing development.
7. Education and Training: Investing in education and training can help to increase wages by improving workers’ skills and productivity. This could include policies such as increased funding for education, vocational training programs, or subsidies for higher education.
8. Labor Market Reform: Reforms to labor market regulations can help to increase wages and job security. This could include measures such as stronger collective bargaining rights, protections against unfair dismissal, or minimum wage laws.
9. Social Welfare: Enhancing social welfare programs can help to support low-income households and make housing more affordable. This could include measures such as housing vouchers, income support, or child care subsidies.
10. Economic Growth: Ultimately, sustained economic growth is the most effective way to increase wages and make housing more affordable. This can be achieved through a combination of sound macroeconomic management, investment in infrastructure and education, and policies to promote innovation and entrepreneurship.
Productivity solves many problems but does the U.K. have the consensus and leadership?
I seem to be of very much the same generation as John Mather and I too believe the current issues go back to changes in the social environment over the years.
When I bought my first house in my 20s at much the same price / salary and mortgage interest rate environment as described by John; in my regional environment the private rented sector was much smaller than it is today and very much concentrated on the “bedsit” / student type accommodation and not family houses. The family housing stock was therefore largely owner occupier or rent controlled social housing.
What appears to have changed is that housing is now regarded as part of wealth rather than fulfilling a social need. While there were always problems with waiting lists for social housing, the income earner could reasonably assume that the family could expect to be housed in suitable accommodation with a rent that was controlled in relation to income, including in retirement. Indeed the usual explanation for the tax free lump sum being available from occupational pensions was to permit the repayment of any outstanding mortgage balance for those whose employment aspired to allow them to enter the owner/occupier environment.
I welcome the IFS’ review https://henrytapper.com/2023/04/26/what-will-the-ifs-pension-review-do/ but regret that the results will not be in place to help influence policy decisions (and even perhaps election manifestos) until 2026.
Figures that surprised me from Zoopla
https://www.zoopla.co.uk/discover/featured-homes/top-10-most-affordable-places-to-live/?utm_source=zoopla&utm_medium=email&utm_campaign=engagement-affordablehouses-investors-20231201
You missed out social or economic revolution. That’s the usual endgame for such inequalities, especially when the victims are the young. Can’t pay/ won’t pay.
When you say “This impecunity means many are having to find ways not to pay housing allowance.” you’re entirely wtong. The costs of Housing Benefit, unlike Council Tax Reduction, are met by a direct subsidy from central government. Nothing to be gained, therefore, by avoiding payment. Indeed, in some cases, the subsidy level can be 105% so it might be profitable if costs can be kept low.