We must make housing an integral part of people's lifetime financial plans and encourage the saving habit, says TISA's Adrian Boulding.
Housing has become a very emotive topic. Owning a property is no longer just about having somewhere to live, it's now viewed as an investment opportunity, an inheritance for children or grandchildren, a pension, a means to meet the cost of long-term care, or a combination of all of these.
For home owners, making mortgage payments is often a priority over saving for retirement - a commonly held view is that the property 'is my pension'. But the reality is that drawing down equity from a house in retirement is often taken as the last available option.
At the other end of the age spectrum, people are struggling to balance saving towards a deposit for that first property purchase, while at the same time contributing towards a pension plan.
Powerful motivation to save
TISA's Savings and Investments Policy project (TSIP) - an unparalleled coalition of more than 50 financial services firms, trade bodies and consumer groups - is tackling this problem and is developing a set of proposals that we hope will make housing an integral part of people's lifetime financial plans and, at the same time, encourage the saving habit.
Britons' love affair with housing is well documented, and the dream of a house deposit is a powerful motivation to save. But house price inflation is making it harder for people - even those on average income - to afford their first home.
Conversely, for those at or approaching retirement, house price inflation is creating a huge amount of personal wealth tied up in retail housing, some studies estimating this to be higher than that invested in the stock market.
However, significant barriers are preventing this housing wealth from being drawn into mainstream retirement planning.
Partly this is due to the feeling that many families have about passing their property on to the next generation as a legacy. The family home is an illiquid asset, often only sold on the death of both members of a co-owning couple.
Housing is therefore often ignored when considering retirement income. We think that there is an opportunity to change that and to bring the family home to the very centre of retirement planning.
First-time buyers are getting older
But we need to recognise that taking the first step on the housing ladder is getting harder by the day. TSIP's original research pointed to a population increasingly having to rent, while an estimated 3 million 20- to 34-year-olds live with their parents.
Home ownership for people born between 1940 and 1960 typically reached 80 per cent of these age groups, however it has plateaued at 66 per cent for those born in the 1970s.
Average house prices continued to increase - rising from 2.5 times earnings to 5 times earnings, with 7 to 8 times earnings in some parts of the country and 10 times earnings for the under 35s.
It should therefore not come as a surprise that the average age of a first-time buyer has increased from 24 in 1970, to 28 in 2000 and 37 in 2013.
The result is a double whammy of the burden of paying rent plus saving for a large house deposit, impacting on a household's ability to save for other events including retirement, while the declining levels of home ownership with each generation mean the ability to make a home work as an income in retirement is diminishing.
Set against this, it has been estimated that the average pension pot size in the UK is £28,000, approximately £202,000 below what would be needed to retire on two-thirds average pre-retirement income.
We predict that unless retirement income provision improves, we will reach a tipping point in 2035 when a generation retires less well off than the previous one - a situation not seen since the establishment of the welfare state almost 100 years ago.
Even those who own their own homes face a dilemma if they want to release equity to create an income in retirement. We estimate that almost a quarter of people would consider this option, but only 2 per cent of retirees currently use equity release.
The alternative is to downsize, and our findings indicate that 16 per cent of people would choose this as a way of providing an additional income in retirement. But this is not always as straightforward as it seems.
First, people have to find a less expensive area to move to. In all likelihood, this will be at a distance from the social and family support networks that they have built up and the impact of this needs careful consideration.
Also, will the move actually generate a large enough sum of money to really make a difference to their retirement income?
Housing is regarded by many people as an important part of their wealth formation, but it is clear that there are many challenges to overcome if people want to realise that asset in retirement.
The government and the financial services industry have a key role to play in helping people to manage the balancing act of putting a roof over their heads and providing an income in retirement.
However, we need to have a much larger public discussion around the changing role of housing and our policy proposals will aim to stimulate the debate.
Adrian Boulding is TISA policy strategy director.
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