The long-term consequences of falling home ownership

A report today from Generation Rent predicts that the number of pensioner private renters will increase by 169% in England over the next 20 years at a cost of an extra £3.5bn in housing benefit.

The increase will come as a result of trends already hard-baked into the housing system and they have nothing to do with the people in their 20s and 30s that we are used to thinking of as Generation Rent.

Successive editions of the English Housing Survey (EHS) have shown that falls in home ownership are rippling up through the age bands as existing private renters get older and find themselves unable to buy.

The report by David Adler of Oxford University and Dan Wilson-Craw of Generation Rent looks at the current EHS, Office for National Statistics and housing benefit data to forecast what will happen by 2035/36.

There are currently 1.1 million private renter households aged between 45 and 64 who will reach retirement age in the next 20 years. Some of them will still be able to buy but on current trends 947,000 will be private renters into retirement.

Add another 50,000 current retiree households who will live into their 80s and you have a million who could be reliant on insecure short-term tenancies and potentially dependent on housing benefit. That could translate into an extra £3.5bn on top of the current housing benefit bill.

Generation Rent argues for investment in new homes to bring down rents and for more legal protection for private tenants and limits on rent rises. Tellingly, it calculates that if today’s 45-64 year-old private renters could access social housing by the time they retire, the taxpayer would save £930m a year in housing benefit.

As with all forecasts you could question some of the assumptions. For example, the pension age will rise in future, new mortgage products could be developed for older people. More older workers could be forced to earn more under universal credit. And some tenants may be former owners who prefer to rent rather than face repair bills or risk losses on over-priced retirement flats.

However, there are also reasons why it could be an under-estimate. For example, future retiree renters will be on assured shortholds with no control over rent rises whereas anything up to 100,000 of the current ones are still on pre-1988 Fair Rents.

Medical advances could see more pensioners living – and renting – for longer and needing help with their housing costs.

And, looking longer term, the children of those renters will be less likely to be able to buy themselves because they will have no access to help from their parents.

Those problems will only be compounded if home ownership prospects do not improve among the generations of private renters who are currently under 45. Recent work by the Resolution Foundation found that on optimistic assumptions they could make up much of the lost ground. However, on pessimistic assumptions (conditions as experience between 2002 and 2012) less than half of millennials will manage to buy by the age of 45, compared to 70% of baby boomers.

This future fiscal timebomb is one reason why the government has thought again about the rise of the private rented sector.

Through most of the 1990s and 2000s ministers seemed relaxed about the growth in buy to let, almost seeing it as cost-free way to boost housing supply.

The penny only began to drop when the headline rate of home ownership began to fall in the mid-2000s (even though ownership had been falling amongst younger people for much longer).

There are signs that the surge in buy to let has been halted by increases in stamp duty and cuts in tax relief but is it already too late?

The fall in home ownership and rise in renting undermines the assumptions at the heart of the asset-based welfare model that governments once assumed would be the basis of the future of the welfare state.

The theory was that home owners would see their housing costs fall once their mortgages were paid off, boosting their incomes in retirement and reducing pressure on the state.

At the same time they would be able to fall back on the equity in their homes if need be, and downsize or do equity release if they needed extra money.

Above all, perhaps, a healthy housing market, with rising house prices, could be tapped to fund social care. After the row about the dementia tax in the last election campaign, governments may be tempted to steer clear, but the rising costs of social care will have to be paid from somewhere.

The irony is that the growth in buy to let is itself asset-backed welfare since many landlords see their rental property as their pension.

For most of the 20^th century rising home ownership acted to reduce inequality. The housing system in the 21^st century has become a mechanism for creating inequality and this will only be reinforced by inheritance as housing wealth passes down the generations.

The long-term consequences for the welfare state are only just beginning to become clear.