The Harvey files 2: housing market part 3

Disillusioned by their experience of other forms of investment, increasing numbers of people are putting money into houses—their own or those they buy to let to others—to provide a nest-egg for their retirement. Thousands are also helping their children to get a foot on to the rapidly receding first rung of the housing ladder by giving them all or part of the initial deposit. By 2006 the proportion of first-time buyers with such assistance had reached 40 per cent, against less than 10 per cent ten years earlier.

Of course, help with a deposit is a transfer of wealth from a generation which has benefited from soaring house prices at the expense of future generations. But if capital is passed on today, it cannot also be available to provide funding for retirement.

In any case, the extent to which the sale of a house can finance old age is limited. Suppose that, not having any children to assist (or deciding to let them fend for themselves) you are able to sell your home at the age of 65, for an imposing £600,000 or six times what you originally paid for it. You will still need somewhere to live, and that could well absorb half of your capital (or the equivalent in rental). £300,000 (or, more realistically, £250,000 after all the costs of selling and moving) will produce a retirement income of no more than about £14,000—a useful supplement to any other pension, but in 20 years' time probably no more than 40 per cent of average incomes, and not necessarily any more than could have been built up by other ways of saving.

And what happens if there is in fact a crash in house prices some time between now and then? The closer that happens to your retirement date the more of a disaster it would be.