Pensions Minister Guy Opperman said in a webinar that he wants to look at ways to adjust auto-enrolment pension schemes to allow buyers to borrow from the pension pot as a property deposit.
There will be fewer people buying today’s fire sale tomorrow.
Like the short-sighted and opportunistic stamp duty holiday, the risk of this next proposal on the ‘Generation Buy’ playlist is that it will artificially inflate short-term demand. And the ensuing buying spree can cause rapid, and potentially harmful to future first-time buyers, increases in property prices. This surge in demand is unlikely to be matched by a surge in supply, as intentionally pushing existing property owners into negative equity is a big no-no. So even if such a surge were to occur, it would continue to do so (if COVID-19 and mass unemployment were allowed to occur).
Dipping into the pension pot may build short-term ‘intergenerational buying’, but we seem to have forgotten the lesson of the right to buy. If we offer today’s buyers a one-time fire sale, real estate ownership will look increasingly distant to tomorrow’s first-time buyers. Rather, the goal should be to provide a stable supply of housing stock (including public housing), alongside efforts to keep property prices in line with inflation.
A pension or a pittance?
Additionally, even if you jump blindly into places where this policy exists (which you would need to do to make it seem like a good idea), you need to consider the issue of compound interest. As Isabel Fraser has put it: “The small sums that are deducted from pensions now (to pay for savings) will turn into much larger shortfalls after decades of missed growth.”
The OECD has declared that the majority of today’s young people will retire at 60% less age than current retirees, and that millennials who want to retire at the same age as their grandparents will need to save an extra £80,000. With this in mind, Boris’ latest gambit is not only reckless for property prices, but could be truly disastrous for future pensioners.
Even if today’s buyers survive by using their pension pots to buy property and build on it to fund their retirement, what will happen to those after them and those after? ?Use up more and more of your pension pot to buy a house At what point would people reach retirement age and have to choose between a home and enough liquid capital to pay the bills if they were encouraged to do so?In short, this latest ‘s proposal criticizes policies that seek to address complex issues too quickly.
There is no guarantee that banks will even accept pension pot deposits.
Another major oversight in this new proposal is that it appears to ignore the situation happening right in front of us when it comes to mortgage approvals. The Chancellor has promised to cut mortgage deposit rates to 5%, but he appears to have made no mention of one of the main reasons why mortgage applications are so often rejected. Yes, the size of deposits matters, but so does the source of the deposits.
As a real estate lawyer tells me, banks don’t just want to know if you have money, they want to know where that money came from. Because that’s a lot of the indicator of whether you can rely on more money coming in. For example, if your mortgage deposit comes from Mom and Dad’s bank, you’re much more likely to be rejected. Banks want deposits with stable, reliable income, generated organically by work groups and individuals, not one-time sums with promises.
I don’t see how this is different from withdrawing money from a pension pot. This is a one-time amount and does not accurately reflect your ability to make monthly mortgage payments. Pension contributions are based on an individual’s salary, but do not take into account factors such as cost of living, job security, or financial wisdom. With this in mind, I’m not sure if banks will accept pension pot-based deposits, but given what we’ve discussed so far, it’s probably a good thing.
Is it possible to combine pension and real estate investment?
In a sense, they already are. In fact, pension funds have been investing in real estate for some time, and Mary-Ann Bowling, managing director at Wringley, said:
“People are right to think of pensions as a solution to the housing crisis, but encouraging young people to take money out of their pension pots and buy homes is deeply irresponsible.”
“There is an historic opportunity to take pension fund cash previously invested in shopping centers and offices and use it to deliver new rental housing.Many pension funds are already investing in so-called We are investing heavily in construction. ”
“This asset class is ideal for investments from pension funds, as pension funds require a stable long-term income stream to match their liabilities.”
“There is a significant short supply of high-quality rental housing in this country, and all indicators show that more people are renting for longer, highlighting the need to provide more rental housing.” I am.”
Of course, this latter point is exactly what Boris is trying to avoid. What he hopes is that more people and young rage will buy it. And while this latest proposal is a worthy goal, it is short-sighted and takes little consideration of posterity.
