Housing policy is too concentrated on first-time buyers and should be refocused towards ‘last-time buyers’ to encourage those aged 55+ to downsize, according to a new report for the Centre for the Study of Financial Innovation (CSFI).
The report, by Professor Les Mayhew, of Cass Business School, also highlights the role of the financial services industry in expanding mortgage offerings and insurance policies to enable older people to monetise their housing wealth. This would not only help them fund retirement but also cover the rising cost of care.
The UK’s housing crisis is the result of a growing population and an inadequate supply of new homes. Demographic analysis suggests that the demand for accommodation could add the equivalent of two new towns, each with 100,000 homes, every year for 25 years.
The trend has been fed by shrinking household size, linked to the ageing population. If there were still 2.48 people per dwelling, as in 1980, rather than today’s 2.36, the UK would have 1.3m more homes available, according to the report supported by Cass and Aldermore, the challenger bank.
But this is not just a numbers game. Professor Mayhew finds that, on paper at least, the UK is not short of housing; rather, it is short of the right sort of housing. Too many older people are stuck in houses that no longer suit them with a lack of affordable alternatives of suitable quality and size.
The evidence suggests that the government should refocus policy on ‘last-time buyers’ to encourage downsizing, including via the planning system and tax incentives. A more efficient approach could reduce the requirement for new homes by up to quarter each year.
House prices set to fall
The report uses a new concept called the Dwelling Index, which combines demographics with data on household composition and housing supply to analyse past, present and future housing needs.
It predicts large rises in couple households in their 60s and one-person households in their 70s and 80s. It also predicts that prices will fall in the 2020s, as the ‘baby boomers’ start to pass their homes to the next generations.
Although this will alleviate some supply-side issues, it does not help those trying to get on the housing ladder now or who are stuck in homes that are too large. More needs to be done – for example, building suitable properties for people to downsize into and creating more social housing for young families.
Financial innovation to free up housing wealth
The role of the financial services is crucial to helping people monetise their housing wealth. This applies not only to the growing market for equity release mortgages – about £4bn of lending in 2018 – but also to greater flexibility in housing-backed lending to people from their 50s onwards.
Another big opportunity set out in the report is for housing equity to be earmarked for insurance to cover care costs. The idea is that payment for the policies could be deferred until the home is sold.
The peace of mind of knowing that care costs are covered would assist in inheritance planning and passing wealth down the generations. But housing wealth is not inexhaustible and the report cautions against reckless lending and unrealistic expectations.
The report’s author, Professor Les Mayhew, said: “The UK population is growing and also rapidly ageing thanks to improvements in life expectancy. By taking a long view, the research clearly shows the origins of today’s housing crisis and what can be done to tackle it. A better alignment of the housing stock with housing needs, along with improved financial incentives, would significantly alleviate housing pressures to the benefit of all.”
Sue Hayes, Group Managing Director – Retail Finance, Aldermore, said: “People in the UK are living longer, healthier lives, providing greater opportunity for their retirement compared with previous generations. This creates new challenges for the way they manage their finances in later life and for the housing market overall, although the financial sector is moving rapidly to meet their diverse demands. Product innovation has extended to later life mortgages, financial advice is improving and specialist lenders are playing a vital role by investing time to assess individual circumstances, with high levels of customer care.”
“The report provides many practical and achievable recommendations on how the UK can expand the options for older homeowners and support their financial freedom. This will require changing mind-sets and a collective refocus from government and the housing industry towards helping last-time buyers. The effect could have a substantial impact in tackling the wider housing crisis.”