Brendan Llewellyn explains why our home ownership obsession undermines proper financial planning...
Home ownership is the single biggest problem in UK financial planning. The problem affects both halves of the population in different ways.
The 40-plus home owners are often way overweight in property (a single holding at that) and believe their house has magical investment powers, while the under-40s, either yet to buy or on the early rungs of the legendary ladder, find the idea of serious retirement provision completely out of the question. It’s all about a house.
How would you persuade a pre-home-owning 30-year-old that the priority should be a nicely diversified retirement plan rather than a house? You wouldn’t.
The obsession undermining true financial planning
When it comes to housing, we lose our rational capacities as investors. We still talk of the ladder even when the snakes are out in force. We need to live somewhere of course but, in the UK, we see long-term renting as a waste – ‘dead money’. Moreover, governments like homeowners so they play a major part in undermining financial planning.
You can tell governments like home ownership because the primary residence CGT exemption persists and has a major distorting effect on private ownership, demand and prices, with an equivalent effect on financial planning. In relative terms, the CGT exemption has become more marked as the tax-based advantages of pension schemes are eroded.
So, if we lifted the exemption and treated primary residence equity the same as any other type of equity, we may be able to dampen the appeal of the home as investment, dampen prices and make proper, diversified financial planning a more appealing option.
CGT losses would then become allowable, which might help free up the market currently blocked by home owners in negative equity.
We would not wish to slow down the operation of the housing market, so the second element of the proposal is to exempt the purchase of primary residence from stamp duty.
This should have a distinct accelerative effect on the number of transactions and lead to the market finding realistic price levels more quickly.
In budgetary terms, the two changes may be neutral depending on your assumptions. Housing may still be an attractive investment but, for your primary residence, that should be a secondary motivation.
Folklore takes a while to build and an age to fade. So the notion of this housing ladder, a one-way route to the top, will continue. The news of many homeowners using credit cards to pay their mortgage is a perfect example of an imbalanced investment mindset.
But, London apart, we now have a group of 30-somethings who have little, if any, equity gain to show for their five years on the bottom rungs.
Their experience will start to filter through and, hopefully, long-term renting may seem less like a poor second choice, and the primary financial goal for the under 40s should be (protection needs taken as read) to start to build a sensible retirement fund which may, or may not, involve some housing equity.
Brendan Llewellyn is owner of Marketing Edge and director of Adviser Home. Read more in Brendan's Armchair critic series HERE.
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