Favourable public policy treatment of home ownership means mortgages are crowding out other forms of long term savings and investment, with potentially significant repercussions for individual pension savings but also for the UK economy as a whole, new NIESR research for the Association of British Insurers reveals today.

In a two part study for the Association of British Insurers researchers began by analysing the savings behaviour of households with a mortgage, using the British Household Panel Survey. They observed an economically and statistically significant decline in those households’ saving rate which, other things being equal, translated in a 15 pc lower private pension income at retirement. This might be one reason why UK households hold a larger share of their wealth in the form of housing that in many other advanced economies.

Then researchers used the National Institute’s own Global Econometric Model (NiGEM) to calculate for the first time the potential cost to the economy of households holding such an unusually large share of their wealth in unproductive housing assets. They did so by simulating the macroeconomic consequences of alternative business investment scenarios.

One scenario assumes that the composition of investment between business and housing becomes more similar to other OECD advanced countries, with business investment increasing from 66% to 80% by 2028. With total private investment held constant, this would see productivity become 2.3% higher and GDP £55 billion higher in 2028 than it would have been otherwise. GDP growth is predicted to be 1.9% rather than 1.7% and an additional 160,000 jobs would be created.

In a second scenario, in which total private investment is also increased from 14.2% to 16.8% in 2028, again more in line with other advanced economies, UK productivity is 3.8% higher than it would have been otherwise, GDP is £90 billion higher and GDP growth is predicted to be 2.1% rather than 1.7%., generating an additional 220,000 jobs.

Dr Monique Ebell, NIESR’s Associate Research Director who co-authored the report, said: “This research helps us to understand how much UK households’ overreliance 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.”

ABI’s Director of Policy, Long-Term Savings, Yvonne Braun, said: “This research clearly demonstrates the value of the long term savings industry. The way savings in pensions are actively invested in businesses and the real economy is good for jobs, productivity and GDP growth. The research also 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. More work and research in this area is vital so we can develop a more balanced and holistic approach to all forms of long-term savings.”

ENDS

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Notes:

The report, entitled , “Is an Englishman’s Home his Pension?”, is available here.

The British Household Panel Survey covers 10,000 individuals each year between 1991-2012.

For further information about the research or to organise interviews with Dr Monique Ebell please contact NIESR’s Press Office:

Paola Buonadonna p.buonadonna @niesr.ac.uk or call: 0207 6541923

The Association of British Insurers is the voice of the UK’s world leading insurance and long-term savings industry. For further information about ABI or to arrange interview with Yvonne Braun please contact ABI’s press office on: 020 7216 7506

NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.

Further details of NIESR’s activities can be seen on http://www.niesr.ac.uk or by contacting enquiries [at] niesr.ac.uk Switchboard Telephone Number: +44 (0) 207 222 7665