Home comforts
New statistics reveal Brits are saving less than people in most developed countries. It seems as though we are losing the habit of putting something aside. Andrew Davis asks, 'Are household savings really in trouble or is it time to change the way we think about them?'
Back in 2014, the Tax Incentivised Savings Association launched a project to encourage more of us to get into the saving habit. The initiative, which includes representatives from 20 financial services firms, lists as the first of its seven objectives to help ‘transition UK consumers from a culture of debt to one of savings’.
This goal – entirely understandable for an industry that makes its money by managing UK savers’ funds – is one that many policymakers share. You don’t have to look far to see why. Figures from the Office for National Statistics suggest that, by mid-2015, Britain’s savings rate had fallen to 4.9%, very close to the long-term low it reached in 2008 as the credit-fuelled boom turned to financial meltdown. But not only are we British saving less than we used to, we are also saving less than most other developed countries. According to the Organisation for Economic Co-operation and Development, within Europe only the Greeks, Danes and Portuguese put aside less of their household income than we do.
More recently, there have been doomy headlines bemoaning an economic recovery fuelled by rampant consumer borrowing. It all starts to make sense: we’re not saving because there’s no point when interest rates are this low, and we can’t afford to anyway because wages aren’t rising much. Instead, we’re spending more of our disposable income and taking advantage of dirt-cheap credit.
Closing the gapBut are we? As Chris Giles, the Economics Editor of the Financial Times, pointed out in a wonderful column in January, the evidence says the opposite. Since 2009, households have added to their debts at less than a quarter of the rate that prevailed between 1997 and 2009. Moreover, he adds: “Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.”
So we are clearly not on another credit-fuelled bender, yet the household savings rate suggests we are losing the habit of putting something aside. Indeed, the whole point of the Government’s drive to get as many of us as possible into workplace pensions through auto-enrolment (and talk of more generous relief on pension contributions for the less well-off) is that we need to close a savings gap that, left unaddressed, will condemn large numbers of people to a grim retirement of dog food by candlelight. This makes obvious sense: given what’s happening to average life expectancy, there is a clear need to enable and encourage people to build up larger pension funds. So do we have a savings problem in this country or don’t we?
We need to close a savings gap that, left unaddressed, will condemn large numbers of people to a grim retirement of dog food by candlelightThere are clearly problems in the way we typically think about household savings. As Giles explains, if you look at both the asset and liability sides of our collective balance sheet, things look uncommonly healthy, largely because many of us own large sums of equity in our home during a period when property prices have risen in most parts of the country. If, instead of looking simply at liquid savings, we thought of all household assets, including people’s main homes, as ‘savings’, then the dismal ratios that place Britain near the bottom of the league would start to look rather different. Perhaps the savings rates that tend to be quoted in the media are less of a problem than we might suppose.
This suggestion was made (implicitly at least) by the Work and Pensions Select Committee in a report published towards the end of last year. Delivering its judgment on the first few months of the Government’s vaunted pension freedoms, the MPs called for consumers to be offered a much more holistic way of looking at all their savings and assets in a single view, including the equity built up in their homes. Underlying this is a growing realisation that as people are living longer, housing wealth is going to play a far bigger role in financing their lifestyles in retirement and in meeting the costs of later-life care for those who need it. This also explains why sales of equity release products are growing so strongly – up 21% in the second half of 2015 – and why the market is attracting serious attention from companies such as Legal & General.
On the houseBut total lending is still tiny by comparison with the mainstream mortgage market. There is much further to go before illiquid home equity can genuinely be transformed into liquid savings. I have no doubt that in time it will be, and no doubt also that even when it is, serious issues will remain. Enabling housing equity to be treated as a pool of savings is no help to those who don’t own property, and many younger people fear they will remain part of that group.
Claiming that housing wealth is the answer to our savings problem is appealing but wrong. But it is part of the answer.
The original version of this article was published in the March 2016 print edition of the Review.