Stumbling and Mumbling

Author: chris dillow   |   Latest post: Wed, 25 Apr 2018, 02:19 PM


House prices as leaky bucket

Author:   |    Publish date:   |  >> Read article in Blog website

The Resolution Foundation says (pdf) that the typical pensioner now has a higher income, after housing costs, than the typical worker. Which poses the question: do younger people have a legitimate complaint here? I think the answer's yes.

First, though, let's see what their grievances are not.

They can have no complaint about rising pension incomes because of the triple lock. Quite the opposite. The power of compounding means this will benefit tomorrow's pensioners - ie today's youngsters - more than it helps today's old folk. (Those who complain that the lock won't last ignore the fact that it is as sustainable as we want it to be.)

Nor can they complain about high pensioner incomes to the extent that these are due to more pensioners having jobs; the number of over-65s in work has doubled since 2005. There isn't a lump of labour, so pensioners don't displace young workers, any more than immigrants do*.

And whilst they do have a legitimate complaint about low pay, this is not a generational issue but rather one about macroeconomics and class.

Instead, youngsters' legitimate beef is about house prices. A big reason why pensioners are better off than them is that many pensioners live mortgage-free in houses they bought cheaply years ago, whilst young folk must pay a fortune in rent or (for a lucky few) mortgage payments. As David Willetts wrote in The Pinch, this is in effect a transfer of wealth from young to old.

The issue here is not merely that the old did nothing to deserve this wealth: no, stoking up bubbles and restricting supply doesn't count. It's that this transfer is inefficient.

Arthur Okun said (pdf) that transferring income from rich to poor was like carrying it in a leaky bucket. Because of administrative costs and adverse effects upon incentives, he claimed, transfers reduce aggregate incomes.

But there's also a leaky bucket when the young transfer their wealth to the old. This is because there are good reasons to think that high house prices are bad for growth. For example, they impede labour mobility or force people to take long commutes which reduces their productivity. They encourage nimbyism and so delay infrastructure spending. They divert resources towards sectors with low productivity growth and so reduce overall growth: if youngsters didn't spend so much on rent, they'd have more to spend on other things, which would help promote innovation and entrepreneurship. In encouraging high debt, they increase the risk of financial crises which have long-lasting adverse effects on growth. And then there's the longer-term cultural effect: if people can get rich by sitting on their arses and seeing their house price increase, they've less incentive to work, save or set up new businesses.

Granted, there's a potential offsetting effect: rising house prices create collateral which allows some people to borrow to set up new businesses. But I think it plausible that, net, high house prices are bad for growth.

Which means that the transfer from young to old is a negative-sum one. Okun was happy to use a leaky bucket to transfer cash from rich to poor. The case for using one to transfer from young to old is, however, far more questionable.

To this extent, youngsters do have a real grievance, as they are on the wrong end of a redistribution which is bad for the aggregate economy.

* This poses the question: why do people complain about immigrants taking their jobs but not pensioners?

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