Image: Rob Noble Image: Rob Noble

The obsession with housing wealth in the UK is damaging the UK economy, or so finds one of the most respected economic think tanks.

To say The National Institute of Economics and Social Research (NIESR) is highly regarded is to make an understatement. It’s been around since 1938, it “S director between 1995 and 2011 went on to become a member of the Bank of England’s monetary policy committee. The current director, Jagjit Singh Chadha, is a Professor and Chair in Money and Banking in the Department of Economics at the University of Kent, a Professor of Commerce at Gresham College and Chair of the Money, Macro and Finance Research Group and a specialist adviser to the Treasury Select Committee. He is also a part-time, Visiting Professor of Economics at Cambridge University.

And now NIESR, which has produced a report looking into the effect of the UK housing market on the economy, in conjunction with the Association of British Insurers (ABI), has claimed that the UK’s obsession with housing wealth could be making the country poorer.

Let’s face it, high house prices are creating enormous social costs. There is nothing wrong with renting, but it can be a problem if you are not allowed to have a pet, or you fear that you may get kicked out if the landlord/lady decides they want to sell the property. In any case, high house prices has filtered through to a high cost of renting too.

The only possible solution lies with some kind of 1990s style housing crash – house prices collapsed in the early 1990s, and in some areas it took over ten years for them to recover. But, a crashing housing market may well spark a recession, as it did in the early 1990s. More to the point, any political party that presided over a housing crash, even if it was what the UK needed for its long-run stability, would be kicked out office quicker than you could say ‘Boris Johnson’.

NIESR, however, says that “favourable public policy treatment of home ownership means mortgages are crowding out other forms of long-term savings and investment.” It added that this is creating “potentially significant repercussions for individual pension savings but also for the UK economy as a whole.”

The report found that households with mortgages tend to save less, which translates into 15 per cent less income from a private pension.

NIESR also suggested that business investment may be adversely effected too, with a much higher proportion of UK savings funding mortgages than investment into UK business, compared to other countries, adversely affecting UK productivity.

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.”

There is a wider point, one not raised by NIESR, but there is anecdotal evidence, revealed by Fresh Businesses Thinking’s own interviews with entrepreneurs, that the rise of generation rent, has helped create a more entrepreneurial culture, as people with mortgages are less likely to take risks with their career.