The Government’s pensions overhaul could signal a return to a time when property wasn’t the major way for Britons to save

Until 1971, more people were renting than owning  – like Germany today


For most people in Britain, their second biggest asset, even if they don’t know it, is their pension pot. It comes second after their house – indeed, for some it will be bigger than their house. Yet the amount of attention most people pay to occupational pensions is a fraction of that paid to property prices. Most people know the value of their home; hardly any the value of their pension.

There are many good reasons for this. For anyone employed in the state sector or in a final salary pension scheme, the asset is or would be a flow of money, not a stock of it. You see the flow into your bank account every month but you don’t control, or even see, the funds behind. As for people on defined contribution schemes, for most the size of the pension has been more a matter of annuity rates at the time of retirement than of the fund buying the annuity. Only the self-employed have had a direct interest in managing their pensions, and given the costs and opacity of the pension industry, for many that has not been a happy experience.

The result is a country where people pay a huge amount of attention to one asset class – residential property – and hardly any to the others, including equities, bonds, commercial property, overseas investments and so on. That stuff was for the experts, not for ordinary people.

We regard this as normal because it has been normal for the past couple of generations, but before the Second World War owner-occupation was relatively unusual and people saved by buying financial assets.

Until 1971, there were more people renting than owning. That is still the pattern in Germany today. And while the UK will not reverse the boom in owner-occupation swiftly or completely, it peaked at 70 per cent in 2002 and has now fallen below 65 per cent. The “my home is my pension” attitude is a waning one.

The new freedom for people to do what they want with their pension pots will further speed this shift. This is partly because of possible trends in asset prices. No one can know what will happen to relative asset prices, but it is a fact that UK housing is towards the top end of historic valuations, whereas equities are about the middle of their valuations.

But it is more because of incentives. Buying a home has the advantage that you can gear up, putting a relatively small down-payment, which is fine if prices do rise, and there is no capital gains tax on the profit. Building up a pension pot, however, has the advantages of tax relief up front – the 40 per cent taxpayer is buying 10 apples for the price of six – and employer contributions.

The changes to the use people can make of their pension pots will change society in other ways. It will to some extent offset the advantage that public-sector workers have over the private sector. The former have guaranteed pensions, which are probably secure despite the rising subsidy that other taxpayers are having to pay to top them up. The disadvantage is they won’t have a pot under their control. In the private sector it will also rebalance the advantage/disadvantage between defined benefit schemes and defined contribution ones in much the same way.

We will see. It is always hard to predict the long-term effect of policy changes when are brought in. What we do know is that it was mortgage interest relief that drove owner-occupation upwards after the Second World War. Most people have forgotten how in 1969 the Chancellor, Roy Jenkins, took the existing tax relief for owner-occupiers and allowed deduction of the tax at source. Prices took off shortly afterwards.

So it is at least plausible that these changes, coupled with the increase in the amount of money people are allowed to put into Individual Savings Accounts, will have as big an effect as those incentives for home ownership. As well as building wealth in physical assets, mostly property, a much larger proportion of savers will build up wealth in financial assets.

Of course there are traps. Financial freedom can result in huge errors. Most people would now accept that it was a huge policy error to allow building societies to be transformed into quoted companies. A great Victorian model of mutual ownership was destroyed and not one former building society that went public remains an independent enterprise.

Easy finance for home purchase has brought misery to people who happened to buy their first homes in the wrong place or at the wrong time. There will be the few who do blow their pension pot on a Lamborghini – though if you are into that sort of thing, a delicious early 1970s Miura would be a great way to go. At least it would be better than being herded into a dreadful annuity.

The Bank’s dilemma: A tale of two rates

Plunging consumer price inflation, but soaring house prices. This is the Bank of England’s dilemma: how do you frame monetary policy when faced with these two very different forms of inflation?

Yesterday’s fall in the consumer price index to 1.7 per cent year-on-year means that this will almost certainly become a year when real incomes rise rather than fall, at least  for those working in the private sector.

The latest annual earnings numbers are a rise of 1.7 per cent for the private sector, and 0.5 per cent for the public sector – though that last figure does include the state-owned banks and if you exclude those, public sector workers did slightly better, up 0.9 per cent.

But this data excludes self-employment and may be understating earnings, so it does look like the year of the pay rise. City forecasts suggest some further decline in the CPI too.

This will not however be of great comfort to home-buyers. Existing buyers face higher interest rates and there has been a surge of mortgage-holders fixing their rates in recent months in anticipation of this. In addition, we have just had official figures that house prices are up 6.8 per cent year-on-year, and up 13.2 per cent in London.

All that money the Bank has printed has to go somewhere. In some parts of London, most house purchasers are cash buyers, and not all of them are Russian.

There is no easy way out of the dilemma, but expect to hear more about prudential guidance. Are mortgage-lenders being wise to advance such  high multiples of value? Probably not.

The harsh truth is that making it easier for people to borrow pushes up house prices, something that our Government needs to acknowledge. But of course it can’t and won’t.

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