Report considers how to encourage "last time buyers"

The Last Time Buyer: housing and finance for an aging society, a new report by Prof. Les Mayhew (Cass Business School) for the Centre for the Study of Financial Innovation focuses on enabling older people to monetise the very substantial wealth that is trapped in the UK’s housing stock. The report suggests that encouraging older people who wish to downsize to do so, would free up much needed housing stock for younger households with families. Furthermore, downsizing would also serve to free up the trapped equity in homes which could be used to help to support older people with the cost of care in their later years.

Housing second greatest source of personal wealth in UK

Housing wealth is second only to pensions as a source of personal wealth in the UK. Net housing wealth is estimated at £4.5 trillion, 65% of which is concentrated in households aged 55 and over. In 2014 80% of over-50s lived in owner-occupied housing. Furthermore, the number of people who will not have cleared their mortgage by the age of 65 whilst still holding significant equity in their home is set to increase over the coming years. The outstanding debt on their properties will serve to reduce their flexibility when it comes to decisions about downsizing. Therefore conversion to lifetime interest-only, portable mortgages and other innovative financial products will be required in order to encourage much-needed downsizing.

The analysis involved population projections up to 2040, which showed that the number of people aged 65 and over is expected to rise by 52% (from 11.4m in 2015 to 17.7m in 2040). This is equivalent to adding two new towns of 100,000 homes every year for the next 25 years. The increase in this particular demographic, one which tends to be centred on one or two person households, means that there will be an increase in demand for appropriate housing which can provide for the needs of an aging population in the UK.

No housing crisis on paper; rather problems caused by mismatch of need and supply

The report argues that there is no housing crisis in the UK on paper at least, and that UK stock taken as a whole appears to be sufficient to meet needs, but rather that there is a fundamental mismatch between the needs of households and the availability of housing which is appropriate for those needs. For example, there has been a steady increase in sole occupancy households, and the number of people set to live alone is predicted to rise by 30% by 2040 and therefore there is a need to align policy with the predicted changing needs of households going forward. The research combines demographic data with information on household composition and housing supply to create a new tool – the ‘Dwelling Index’ - which represents a core measure of housing needs. The Dwelling Index recognises how housing needs change over a lifespan, affected by life events such as the birth of children or children leaving the home and so demographic forecasts are used to predict housing needs in the case of this research, up to 2040.

Encouraging downsizing by providing suitable properties for older households

The report calls for greater encouragement for over 55s to downsize (including a one-off stamp duty break for older home owners) and new construction aimed at what Prof. Mayhew terms ‘last-time buyers’, taking the focus away from building family homes aimed at first time buyers. The report argued that a lack of suitable properties for older households to be able to downsize to, as well as the high transaction costs for moving serve to discourage much needed downsizing which could serve to release properties more suited to growing family needs without the need for additional construction of this type of home. Whilst mainly focused on the needs of older households, the report also highlights the reduction in availability of affordable homes for families and places some of the blame for that on the ‘Right to Buy’ scheme, which took many houses out of social control which were not subsequently replaced. The report therefore recommends that local authorities should be allowed to borrow in order to build additional affordable homes for young families.

Affordability issues for all age groups was a major concern of the report which noted that the increase in house prices seen in the last 30 years has not been accompanied by corresponding increases in earnings. The report points out that the historic link between house prices and earnings (which had held for decades) was ruptured in the late twentieth century when average house prices began to fall out of step with earnings. Looking ahead to the 2020s, the report suggests that there will be some natural welcome downward pressure on house prices as a consequence of the property-owning ‘baby boomers’ dying out, freeing up larger properties, but does not address the increase in inequality brought about by property inheritance. The report ignores the potential for this increasing inequality to result in wealthier young families (perhaps benefitting from inherited wealth) being the only ones with the means to buy the newly available properties.

Report fails to consider affordability issues

Prof Mayhew argues that if people were to downsize to homes more suited to their space requirements, 50,000 fewer homes would need to be built each year. There is an implicit assumption in this statement that those houses which were being vacated by older people would be affordable for younger families in need of additional space, but this is in stark contrast to the data which is also presented concerning affordability issues. There are also other unacknowledged reasons for older people to want to remain in their homes in spite of the unused space, which are more to do with emotional attachments, which Prof Mayhew does not address in the utilitarian approach taken in the research.

Innovative financial products needed to convert housing wealth into retirement income

Innovation in financial services was also a major focus of the report, which called for new financial products aimed at older homeowners such as more innovative equity release schemes and insurance products which would cover the cost of long-term care (should such be required) with the premiums paid after death from the sale of property on which the insurance was based. In this way, the report recommends that new financial products should be explored in order to help to convert housing wealth into retirement income or security for covering the costs of care in later life.

In drawing together available evidence on housing needs from a range of data sources, the research has attempted to put a scale on the issues facing UK policy makers for the first time. The research confronts the inevitability of the effects of an aging population on housing needs and demonstrates the case for a more holistic approach to housing policy. In this regard and in the development of the ‘Dwelling Index’ the research is a major contribution to a much-needed conversation on housing policy in the UK in the twenty-first century.