A recent report by the National Institute of Economic and Social Research (NIESR) argues that ‘tax subsidies for housing skewed the investment landscape’, causing households to concentrate on buying property at the expense of other forms of long-term saving such as pensions.
Notwithstanding that home ownership rates have been falling for more than a decade, from a high of 71 per cent of households in 2003 to 64 per cent in 2015, NIESR regards the trend as inadequate and expresses concern that ‘cash that could be otherwise used by pension funds to invest in business is instead being locked up in expensive homes which are economically unproductive’.
On my first reading of the FT summary, which was admittedly rather early in the morning, there seemed to be a lot of sense in the arguments being put forward. However, on a further reflection I am not so sure:
- Tax incentives for owner-occupied residential property are now very limited. Many years ago, mortgage interest qualified for full tax relief which was gradually phased out completely. The only tax relief of any present note is the capital gains tax exemption when a qualifying main residence is sold at a gain. The policy intention of this is clear: when an individual or hard-working family needs to move to a larger property, it is not right that the government should restrict the funds available for the new purchase by claiming tax on any gain on the sale of the old home
- To imply that pension savings are not tax-favoured is to completely overlook the debate about pensions tax relief which has been raging for many years. Shortly stated, most UK pension contributions qualify for full tax and national insurance relief, followed by tax-free growth for investments held by pension funds.
If the FT summary is representative of the NIESR document as a whole, then the reasoning simply doesn’t stack up.
There also seems to be one glaring omission. A generation ago, graduates would emerge from university without having incurred significant levels of indebtedness to the Student Loan Company. Now student loans, totalling £64.7bn for England at 31 March 2015, are a major burden with repayments being enforced through employers' PAYE schemes.*
It would be equally valid, therefore, to argue that student debt is as much (if not more) of an impediment to long-term productive saving than is the capital gains tax relief on main residence sales.
* To put this in context, mortgage debt in England stands at around £902bn.