Mortgage borrowing impacting long term savings and GDP growth, warns NIESR

Rozi Jones
15th November 2017
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"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."

A UK obsession with home ownership means mortgages are crowding out other forms of long term savings and investment, with potentially significant repercussions for individual pension savings and the UK economy as a whole, according to NIESR research for the ABI.

By analysing the savings behaviour of households with a mortgage, researchers observed an "economically and statistically significant decline" in those households’ saving rate which translated in a 15% lower private pension income at retirement.

NIESR noted that UK households hold a larger share of their wealth in the form of housing that in many other advanced economies.

Researchers used NIESR’s own Global Econometric Model to calculate 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, added: “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.”

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