Angus Hanton suggests that the older generation needs official encouragement to downsize
David Willetts recently praised Homeshare International for a project they operate to encourage older people in large houses to lend rooms in their houses to younger people in exchange for help in looking after the house or them (or the garden). Whilst this represents great intergenerational cooperation and does create some wonderful mutually beneficial arrangements, one wonders whether it gets to the heart of the problem.
Housing discussions dwell on the supply side and new building
It is commonplace in housing discussions to move speedily, almost seamlessly, from an acknowledgement of a shortage of housing to analysis of the obstacles to new building. Also interviewers move very quickly from questions of how difficult it is to buy housing to ways in which they could be enabled to borrow more easily and to borrow more.
Both these approaches fail to look at whether the intergenerational distribution of housing is fair and, if not, what might be done about it. In general, purchase of very expensive housing by young people from older people is, from an intergenerational point of view, moving the assets in the wrong direction.
That is because, to the extent that house prices are above rebuilding costs, the buyer is paying a premium for the land. This premium has become very high as a direct result of the limiting of permissions to build. To the extent that purchases by younger buyers from older buyers are paying this premium (or scarcity tax), there is a transfer from the younger generation to the older generation. It is not obvious that in the long term this premium on land will remain.
Housing need out of kilter with housing wealth
We know that a typical family’s housing needs peak when they have children, but nationally housing wealth is concentrated around much older couples and individuals – so there is a serious mismatch. There is also a size-of-unit mismatch, as our housing stock contains more larger units than are needed and too few smaller ones.
Why is housing ownership so intergenerationally unbalanced?
Two factors seem to have contributed to the current impasse: tax and increased longevity.
Taxation of UK housing is by international standards very light. There is no capital gains tax on the sale of a principal private residence, and council taxes are comparatively low. In addition, tax breaks have historically helped current older people to finance their house purchases – in the 1970s and 1980s MIRAS (Mortgage Interest Relief at Source) made borrowing tax-efficient and today tax rules make buy-to-let attractive to older investors.
The fact that people live much longer has meant simply that they tend to stay in their houses for longer: this result is even more pronounced for owner-occupiers than tenants for socio-economic reasons. Putting that point bluntly, the middle classes are both more likely to be owner-occupiers and to live a long time.
Obstacles for older people in downsizing
Many older people would like to downsize but cannot do so because of the difficulty of finding more suitable accommodation and because they see their homes as good savings vehicles.
Significant changes to the taxation rules would certainly help with this problem, but there is another possibility which could help: the government could establish an official “Downsizing Agency” which would work to encourage the downsizing process to the benefit of all parties. It could help with information, input into the planning process, and generally make people more aware of society’s vested interest to make it easier for older owners to downsize.