Home Ownership and Pensions: Causality and the Really Big Trade‐off

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Abstract
Starting from the now well‐established observation that across economically advanced countries there has been a trade‐off between levels of home ownership and generosity of pensions, this paper explores the direction of causality: does home ownership effect pensions, or do pensions effect home ownership? It argues that critical to the relationship is not tenure itself but rather the potential to invest and thereby smooth consumption across the life cycle, which may be deemed functionally equivalent to taxation and state expenditure that offers a key to understanding the nature of the relationship. Using the Granger causality test, with data covering the OECD countries, the paper investigates the possible direction of the relationship. Its main finding is that there is statistical support for the proposition that across all countries examined increases in housing assets are followed by reductions in the generosity of state spending on older people, i.e. that a trade‐off which operates from the housing market and impacts on state spending has existed over several decades. The relationship is most significant in countries in which state spending on older people has been most generous and has been most weighted toward high income groups.