How does the housing market affect wealth inequality?

Many UK housing policies – originally designed to boost wealth and distribute it more equally – are outdated and no longer achieve their aims. Rising house prices have concentrated wealth among older people and in certain regions. New approaches are needed to reduce these inequalities.

Historically, home ownership has been seen as a way for less affluent households to build wealth. This notion was adopted by Australian policy-makers in the early 1900s (Berry, 2010); it was discussed as the basis for a ‘property-owning democracy’ in 1920s Britain; and it was a priority action in the 1934 US Housing Act (Grigsby et al, 1983).

From the 1950s, more countries espoused the aim of growth in home ownership (Causa et al, 2019). Governments used tax incentives, created lending circuits and mortgage insurance arrangements, and took regulatory measures to assist households on moderate incomes to access capital at low interest rates to buy homes (Hilber and Schhni, 2016; Mulheirn et al, 2022; Stephens et al, 2015).

Policies promoting home ownership had a clear economic rationale. Purchasing a home using a mortgage was regarded, both by governments and households, as an effective means of rebalancing savings and spending across the lifecycle of household incomes.

That shift helped households in later years by reducing housing outgoings or, in some cases, increasing income via lettings and making bequests. By encouraging home ownership across a broader range of incomes, it was intended to promote asset ownership among a wider range of socio-economic groups.

Research suggests that this approach – using home ownership to strengthen household capital formation and spread it more equally – was successful until the late 1970s (Piketty, 2018; Maclennan and Miao, 2017; OECD, 2021).

But in the decades since then, rising house prices – particularly relative to incomes – have made savings from working largely insufficient to buy a home. This is especially the case for lower-income individuals and for those without family wealth to help raise a deposit.

This has had consequences for social mobility (the extent to which young people’s opportunities in life are affected by their family backgrounds) and long-term wealth accumulation – concentrating wealth among older groups and in metropolitan areas.

Did home ownership bring wealth?

In the early period of home ownership, the system of accumulating wealth through housing was driven by household incomes (reflecting work efforts) and household spending and saving decisions. It was also linked to household spending preferences for home ownership.

Household effort and thrift with month-by-month mortgage payments drove the steady accumulation and spread of individual housing wealth. With house price growth rarely exceeding low inflation rates, capital gains were a minor element in the accumulation of wealth.

Through most of the period following the Second World War, housing inheritance amounts were substantially smaller (in real terms) than now. They also tended to be received earlier in an individual’s life (Forrest and Murie, 1995). To an extent, this may also have reflected trends of growing life expectancy.

Low house price inflation had a crucial effect in allowing a broader range of housing choices (known as tenure-neutral) – including owner occupier, landlord or renter – and of asset portfolio selections.

Owner occupation was not always the best choice for all households, and there is some evidence that renting could bring about higher household wealth than owning in the pre-1980s period (Goetzmann and Spiegel, 2002).

Rental choices remained an alternate, broader and long-term option for some lower-income households. This route was reinforced through regulatory measures that controlled rents and rental growth, and therefore suppressed housing costs.

What has changed in recent decades?

This, now historical, account of the savings and wealth-spreading merits of home ownership remains the core narrative of housing policy, which continues to promote house purchases.

Unfortunately, these key policy beliefs now fly in the face of decades of evidence that housing market processes and outcomes have fundamentally changed since these ownership policies were set.

Real house prices – in the UK and elsewhere – were relatively stable until the mid-1970s (OECD, 2021). They have since sustained long-term increases, through significant cyclical phases.

In inflationary contexts, housing assets (especially when financed by mortgages) can quickly become an unintentionally ‘speculative’ investment. When general inflation rates are not quickly reflected in mortgage rates, inflation writes down the real value of mortgage repayments.

These effects were important in the UK until the late 1980s when the real value of mortgage debt was quickly written down. They have become important again since 2021, as inflation has once again risen.

After the 1980s, in the long boom with surplus global savings, the environment for mortgage lenders and borrowers was one of low real interest rates and inflation rates. Mortgages became relatively cheap to repay. Where house prices rose ahead of inflation, and reduced the cost of capital, house purchases became a route to asset accumulation.

Critically, in the same period, extensive, competition-enhancing deregulation of mortgage markets (Mulheirn et al, 2022) allowed households to make different choices in recognising more diverse income sources. This also permitted loan-to-income ratios to rise substantially from typical pre-1980s values (from two to three, to five or six) and facilitated higher loan-to-price ratios (with higher lender risks).

These changes brought a range of different mortgage instruments, particularly a marked increase in the use of fixed-rate mortgages. They also boosted mortgage equity withdrawal and expanded the ability to borrow more for investment in buy-to-let properties since 1996.

The UK – like most countries – did not create efficient housing markets to serve financial deregulation. Most obviously, choices to do so would have induced voter resistance that financial regulation did not.

For example, reform of housing supply systems would have facilitated output responses to have a more flexible supply of housing. Similarly, changes to the housing tax system would have raised fiscal resources and reduced speculative demands.

As a result, the political economy of home ownership policies created an inflationary bias that has undermined the savings and wealth-spreading roles of owning property. This has, instead, shaped a ‘rentier’ housing economy (Maclennan and Miao, 2017).

It is now inaccurate to see home ownership as a route to steady savings. The ‘passive’ speculation phase, in which homeowners simply accepted gains made from ownership, had stopped by the early 2000s.

Homebuyers have since moved to housing asset speculation. More frequent trading-up and multi-home ownership reflect proactive strategies and active leveraging approaches to maximise the capital gains from housing (Ronald et al, 2015).

As real house prices have risen relative to incomes, savings from working are generally no longer sufficient to meet rising deposit requirements. This has especially been the case for more marginal borrowers after the introduction of ‘prudential borrowing’ regulations following the global financial crisis of 2007-09.

Today, inheritances and support from families play an increasingly important role in raising money for deposits for first-time homebuyers and even to help younger buyers to become landlords (Searle, 2018).

Housing wealth is not simply an outcome of housing choices, but also a result of leveraging and family gifting. Bequest patterns have now become a key determinant of further housing and tenure choices.

Incomes and savings are no longer the only drivers of housing decisions, but are joined by accumulated housing wealth. This has made the wealth formation process increasingly recursive within extended families, which has consequences for social mobility and long-term wealth accumulation.

A further consequence of sustained house price rises, with largely unchanged housing taxation systems, has been that ‘steady savings’ through mortgage repayments account for an increasingly smaller share of total accumulated housing wealth and growth in housing equity.

House price appreciation – not savings – primarily drives growth in housing wealth (Corlett and Leslie, 2021). This has led to important differences in accrued household wealth between regions (with growing metropolitan areas as faster gainers than rural regions) and between generations (with older cohorts of owners having substantially more housing wealth) (Maclennan, 2012).

In the ‘speculative’ era of home ownership, there is also evidence to suggest that the desire for capital gains has led to riskier house-buying choices (despite prudential borrowing policies).

Changes in labour markets – with more ‘flexible’ contract arrangements and more disrupted patterns of earnings across an individual’s lifecycle – along with more varied and less permanent family relationships and longer life expectancies than in the 1970s, have led to more disrupted patterns of growing housing capital.

Uninterrupted owner occupation – with steadily accumulating wealth – is a diminishing prospect for first-time owner cohorts. Recurrent switches between owning and renting at all stages of people’s lives have become more commonplace (Köppe, 2018).

A recent Australian study highlights the costs of the insecurities that emerge for marginal homeowners who are at risk of ‘falling-out’ of ownership (Wood et al, 2013). It also emphasises the enhanced wellbeing that secure owners enjoy compared with those in other housing arrangements.

The housing, and related, policy narratives that initially drove government commitments to home ownership no longer appear to apply. Changing policies, labour markets and household behaviour suggest that housing market processes have altered.

What does the evidence on housing markets and wealth now suggest?

In broad terms, the post-1970 patterns of growth in home ownership and wealth suggest that outcomes no longer always match initial policy aims. Further, the damaging collateral consequences of meeting them may be considerable.

Many studies of home ownership and wealth inequality are focused on the UK (such as Forrest, 2018, 2021; Forrest and Hirayama, 2018; Forrest and Murie, 1995). As noted above, there is a historical cross-country negative association between home ownership and wealth inequality (Causa et al, 2019).

Recent evidence suggests that larger shares of home ownership within a country or region still result in smaller overall wealth inequalities for post-1990 outcomes through spreading wealth among middle-income households (Bivens, 2015; Kindermann and Kohls, 2018; O’Farrell and Rawdanowicz, 2017).

Higher home ownership may not necessarily mean a more efficient housing system or a more stable economy. But overall it may still induce more equal wealth distributions (Soaita et al, 2019). The effects of extending ownership via access to mortgage finance still offset any rising inequality of owners versus renters, but the policy costs appear to be rising (as home ownership rates are now falling in major economies).

Yet since the 1980s, and in contrast to earlier periods, it is also apparent that rising house prices in advanced economies can mean that home ownership increases inequality. This trend has strengthened since 2000 (Fuller et al, 2020) and through the house price boom during the Covid-19 pandemic (Ong ViforJ and Phelps, 2023).

In the UK, a series of reports from the Resolution Foundation suggests that although inequality in household wealth has been stable in the past 14 years (Shah, 2022), the absolute wealth differences across intergenerational cohorts are larger and show signs of increasing, particularly during the pandemic. This is possibly due to the housing wealth windfalls for different age cohorts (D’Arcy and Gardiner, 2017; Leslie and Shah, 2021).

Overall, home ownership in the UK has been in decline since 2004, particularly among younger generations (Whitehead and Williams, 2017). Indeed, home ownership for younger cohorts fell by half between 1989 and 2016, with a small recovery in recent years (see Figure 1).

Intergenerational inequalities are growing since older generations have been able to accumulate wealth at a faster pace than younger generations, benefitting from passive strategies that make use of outright home ownership exclusively in terms of rent-free living and tax settings (Bourquin et al, 2022; Shah, 2022).

Figure 1: Home ownership rates by generation

Source: Corlett and Odamtten, 2021

Note: RF analysis of ONS Labour Force Survey, Family Expenditure Survey. A family unit is a single adult or a couple living together (plus any dependent children).

Decreasing equality in overall wealth distribution as a result of rising rates of home ownership is consistent with rising inequalities within particular groups – most obviously between localities, between tenants and owners, and between generations. Evidence suggests that these inequalities have risen and social mobility has fallen as a result of housing outcomes (Ong ViforJ and Phelps, 2023).

This raises important questions as to whether home ownership growth and housing wealth formation have been well managed, and whether they can still assist with key policy goals or whether major policy shifts are required.

How can housing policy improve economic performance and reduce inequality?

These patterns raise three different sets of economic policy questions. The first is whether the trends in housing wealth accumulation have undesirable consequences for the growth and stability of the economy.

The second is whether the longstanding policy aim of shifting early career incomes to retirement assets can still be adequately fulfilled by the accumulation of housing wealth.

Finally, there is the challenge of either attenuating or redistributing real capital gains from housing in ways that would mitigate, rather than exacerbate, both housing affordability difficulties and economic challenges.

Accumulated wealth and stability consequences

It has been argued that housing wealth changes within an economy should have a neutral effect on the macroeconomy (Buiter, 2008). But regional, social and other inequalities mean that this is not the case. Rising housing wealth, alongside new financial instruments for equity withdrawal, has boosted spending in upswings and exacerbated downswings (Soaita et al, 2019; Duca et al, 2021).

Mortgage market deregulation has had significant leveraging and choice benefits for borrowers, but it has also had a complex and repeated interaction with real house prices. It affected the macroeconomy and changed house-buying behaviour. In so doing, it removed significant stabilisers in the housing market (limiting loan-to-income ratios) and introduced new potential sources of instabilities (for example, equity withdrawal reinforcing cyclical amplitudes).

Increases in government support for first-time buyers to counter fluctuations in the economic cycle accelerate purchases for some households. But these subsidies are almost entirely capitalised into high prices, thus raising the entry bar for the next cohort of owners (Shoag, 2019).

Nevertheless, governments may see such effects as positive if they are seeking to protect asset values of existing home-owning voters, and where house prices and expectations are regarded as affecting household spending.

More widely, there is now a growing recognition that in the UK, and similar housing markets, households may have used their gains from economic progress to raise house prices rather than to develop new business, human and property capital.

Unfortunately, although there is growing evidence of housing wealth-induced instability effects, there has been little research on how the drive to raise home ownership may have adversely affected capital allocation and growth within economies.

Countries can no longer ignore these important economic stability and growth questions, let alone the broader questions of how high household mortgage debts constrain monetary policy decisions.

Housing wealth to pay for old-age care

Providing household support for old-age costs was a core goal in early policies for housing wealth in most countries. It has recently been re-emphasised in policy debates about housing asset-based ‘welfare’ (HABW) spending by individuals.

Using HABW to replace public spending on welfare services has been a strong thread in UK policy debates since the 1980s (Ronald et al, 2015). But the unequal distribution of housing wealth gains across different areas of the country and between different social groups – along with the falling rate of home ownership, especially among younger people – has led to questions about the effectiveness and sustainability of HABW policies (Lersch and Dewilde, 2018; Soaita et al, 2019).

Further, the growing instability of housing tenures through the lifecycle, especially for precarious owners, mean that adverse life events (such as sickness, bereavement, unemployment and relationship dissolution) will see housing assets eroded before retirement in many cases (André et al, 2019; Soaita and Searle, 2016).

As a consequence, asset-based stratification rather than asset-based welfare represents the role and position that housing wealth plays in contemporary social structures (Forrest, 2018) and indeed policies.

Government commitments to meet net-zero targets, with residences responsible for a quarter of carbon emissions, now require major investment in new domestic energy systems. Present policy discussions contemplate subsidies to accelerate owner installations.

But given the extent of housing capital accumulated (primarily unearned) by existing owners, it may be that suitably designed equity withdrawal instruments are a better way to fund these net-zero policies than increasing public expenditure.

Strategies to distribute wealth

Despite the longevity and severity of the problem of rising house prices, governments have ‘kicked the can’ of dealing with the problem down the road. With inflation targeting as the core remit of central banks, monetary policies have paid insufficient attention to how rising investment and real prices for the existing housing stock lay the foundations for a rentier economy rather than an entrepreneurial/innovation economy.

Institutions responsible for prudential borrowing appear to pay much less attention to the long-run wealth effects of borrowing than the safety of loans made. In recent inflationary phases, central banks – and the associated prudential regulation authorities – in Australia, Canada and the UK have all been quick to claim minimal responsibility for house price outcomes (and, by implication, wealth redistribution through housing).

If monetary policy arrangements since the 1970s have not addressed the consequences of deregulation, and indeed non-traditional quantitative easing, for house price and wealth outcomes, it is equally clear that there has been a sustained failure to reform key demand and supply policy influences from the ‘pre-inflation/housing as savings’ era that now exacerbate adverse housing outcomes.

The unwillingness to address unearned capital gains on housing assets was relatively unimportant before the 1970s, but it now has significant implications for stability, fairness and productivity.

The taxation of land and housing, at least in the UK, has changed little despite shifts from eras of low inflation to high and unstable house price appreciation (Leslie and Shah, 2021; Shah, 2022). For example, the upward adjustments of limits for exclusion from inheritance tax have softened housing-related tax revenues since the 1980s.

There is a plethora of research that sets out clear principles for housing tax reform (for example, Adam et al, 2011 for the UK, and Henry et al, 2010 in Australia). There are cogent and widely accepted arguments to reshape taxes on housing capital gains, on unused land and on property transactions.

These would not only to reduce speculative housing asset purchases, but also raise tax revenues in efficient and fairer ways. There are clearer ways to more affordable housing outcomes, stronger fiscal bases and faster growth.

Monetary and fiscal policies that support more efficient and stable housing markets would help to reshape the demand side of housing systems. Presently, there is much debate that focuses on housing solely as a supply-side problem.

The importance of more responsive local and strategic housing and land planning in the UK, and elsewhere, cannot be understated. The failure of UK governments to reform land use planning systems to be both more flexible in the face of rising housing demands and to meet wider social and environmental goals is longstanding.

Viewed against some basic economic principles, and evidence of system outcomes, much housing taxation and planning policy seems outdated in today’s challenging times. Questions remain about why they are still in place and why we lack coherent national housing market/price and wealth strategies.

What role does politics play?

Housing, the financial sector, monetary, fiscal and planning policies all evolved in an unbalanced fashion, and have transformed the steady savings model of home ownership into a speculative system in which the majority of households participate, increasingly actively.

This system sits not just at the centre of national and local economies, but also at the heart of politics. The untaxed accumulation of housing capital gains and the ability of communities to use the planning system to restrict housing supply reflect the importance of homeowner majorities across UK constituencies.

Reduction in overall home ownership is slow, but the political consequences of unaffordable home ownership for younger households are magnified, not only by regional and local concentrations of effects into particular types of constituencies, but also because pressure effects are spreading significantly into rental markets, especially in larger cities.

In the longer term, if politics does not change its understanding and governance of the homeowner sector, unaffordable housing outcomes will change governments.