Housing and social mobility in Jersey

Introduction

The Policy Centre has commenced a programme of work on social mobility. The objective is to promote an informed debate that will facilitate appropriate policy measures. A steering group has been established to oversee the programme. The terms of reference of the group and its membership are set out in the appendix.

The programme of work covers a number of distinct areas each of which may result in a separate report, with a final report being produced at the conclusion of the project.

As a starting point the Centre has published a background paper comprising a brief description of the concept of social mobility, a summary of available data and a suggested set of issues to be considered.

This paper covers the specific area of housing and social mobility. Other areas of work that form part of the programme are –

• Using available data, where does Jersey stand on social mobility in relation to other jurisdictions and what are the main issues limiting social mobility.
• Social mobility and immigration.
• The role of employers in promoting social mobility.
• Early years provision.
• Primary, secondary and tertiary education.

Summary

Social mobility refers to change in a person’s socio-economic situation, either in relation to their parents (inter-generational mobility) or throughout their lifetime (intra-generational mobility).

Housing is not seen as being a key driver of social mobility generally compared with, for example, conditions in childhood and education. However, Jersey’s special circumstances mean that it is relevant, particularly because people have to live close to their work and house prices have increased substantially in real terms.

In the UK the fall in home ownership generally has been far more pronounced among those whose parents are not owner-occupiers. Home ownership and housing wealth accumulation is increasingly associated with parental wealth.

In Jersey over a long period house prices have increased substantially in real terms. Between 2000 and the end of 2022, house prices increased by 141%, rents by 128% and retail prices by 102%. Average house prices in Jersey are 133% higher than in the UK and 26% higher than in London.

The “Bank of Mum and Dad” is important in helping people meet housing costs, and particularly to become home owners. But many households are struggling to meet day-to-day costs and are in no position to help children with house purchase. Tenants are more likely to be in that position than owner-occupiers. The most recent Jersey Opinions and Lifestyle Survey found that 46% of social housing tenants and 34% of private tenants found it difficult to cope financially, compared with 14% of owner-occupiers.

The operation of the housing market has worsened social mobility in Jersey. Those who bought homes many years ago have benefitted from the significant rise in house prices and have been willing and able to use the increase in wealth to help their children with housing costs, in particular to become home owners.

So in practice there is a two-tier market in Jersey –

• Those who can be helped by their parents to buy housing, those parents having acquired capital as a result of the rise in house prices.
• Those who cannot be helped by their parents to buy housing, those parents having been tenants and have therefore not acquired capital as a result of the rise in house prices.

There is of course another two-tier market, as a result of the requirements for residential status. Some people who have made a valuable contribution to the Island, for example in education or health services, have been prevented from becoming home owners, even when able to afford to do so, and therefore have not been able to benefit from the rise in house prices.

The rise in house prices has effectively removed the beneficial effects of tax and benefit policies in reducing income inequality. Income inequality in Jersey is greater than in all but two European countries even before housing costs are taken into account.

This issue cannot be considered in isolation but needs to be examined alongside other aspects of social mobility, in particular education, and the housing market generally.

The effects of the high cost of housing can be addressed in two ways – seeking to reduce the cost of housing or by using tax and other policies to redistribute the gains in wealth that have resulted from the increase in house prices. In practice, the significant real fall in house prices which is currently occurring may well have a favourable effect on social mobility although adverse consequences in other ways. Possible measures that merit consideration are giving social housing tenants the right to buy their homes or transferring to them part of the equity of their homes in exchange for them paying a market rent on the remainder.

What is social mobility?

The OECDhas a simple definition of social mobility –

Social mobility refers to change in a person’s socio-economic situation, either in relation to their parents (inter-generational mobility) or throughout their lifetime (intra-generational mobility).

Social mobility is linked to equality of opportunity: the extent to which people have the same chances to do well in life regardless of the socio-economic background of their parents, their gender, age, sexual orientation, race, ethnicity, birthplace, or other circumstances beyond their control.

Social mobility and equality of opportunity can be measured in terms of earnings, income, or social class, but can also be understood to encompass other well-being dimensions such as health and education.

The OECD went on to explain why equality of opportunity is important –

People from disadvantaged backgrounds have fewer opportunities to climb the socio-economic ladder. In European OECD countries, children with the greatest socio-economic disadvantage grow up to earn as much as 20% less as adults than those with more favourable childhoods. Across OECD countries, it takes nearly five generations for children from low-income families to approach the average income in their country. Unequal opportunities are not only a moral concern, but they also undermine economic and social prosperity.

Key drivers of social mobility

It is generally accepted that there are four major drivers of social mobility –

• Conditions of childhood.
• Educational opportunities and quality.
• Work opportunities.
• Social capital.

Housing is not seen as being a key driver of social mobility generally. However, Jersey’s special circumstances mean that it is relevant –

• Jersey is a small Island which in practice means that people live within 10 kilometres of their work.
• Jersey has strict controls on immigration and a number of policies that favour local people over immigrants.
• Jersey has had a thriving economy in the post-War period which has resulted in a significant increase in population.
• Planning policies have restricted the supply of housing as a result of which house prices, and therefore rents, have increased substantially in real terms.

UK and international evidence on housing and social mobility

The Sutton Trust promotes social mobility through programmes, research and policy influence. It published a particularly significant report in 2022 –

Social mobility – past present and future . In respect of housing this noted that while there has been a fall in home ownership generally this has been far more pronounced for those whose parents were not owner-occupiers. Between 2000 and 2017 the gap in home ownership rates between those who grew up in rented accommodation as opposed to owner-occupied accommodation grew by 16 percentage points. The report also notes that the average percentile wealth rank is between 15 and 19 points higher for those who grow up in owner-occupied as opposed to rented accommodation.

Paul Gregg and Ricky Kanabar of the University of Bath have recently published an important academic study Intergenerational wealth transmission and mobility in Great Britain: what components of wealth matter (UCL Centre for Education Policy and Equalising Opportunities, Working Paper 22-01, June 2023). Its conclusions in respect of housing are summarised –

• Our findings show offspring home ownership and housing wealth has become increasingly stratified by parental wealth even after controlling for individuals’ own characteristics. Among individuals aged 35 whose parents owned their own home and are highly educated, home ownership is 3 times more likely, and conditional on having housing wealth the level reported is 10 times higher than that reported by individuals whose parents are from a low educated renter background.
• If current trends are maintained our results imply the intergenerational wealth elasticity in housing wealth is set to double in approximately one century.

Gregg’s and Kanabar’s analysis notes the widening in wealth inequalities in Great Britain and argues that the change is largely attributable to growing inequalities in housing wealth. They continue –

A second major finding is that across successively younger cohorts’ homeownership and housing wealth accumulation is becoming increasingly associated with parental wealth. Cohort analysis shows that among younger individuals in their early 30s from the wealthiest backgrounds housing wealth is being accumulated at a similar or even fasterrate than older cohorts. On the other hand, individuals from the most disadvantaged backgrounds in their early 30s are not only lesslikely to report homeownership compared to slightly older cohorts but the rate at which housing wealth is being accumulated is also falling compared to individuals from the same parental background but who are slightly older. By age 35 homeownership levels are threetimes higher among offspring whose parents are high educated homeowners compared to those whose parents are from a low educated renter background, and in terms of housing wealth the former group holds approximately ten-times the level of housing wealth compared to the latter. Such differences in housing wealth between the most and least advantaged persist between ages 30 and 64 and are set to widen further. Importantly, we show that our findings hold even after controlling for a range of individual characteristics which are likely to influence homeownership such as earnings and education.

Taken together the results imply the penalty for being born to parents of low wealth is growing rapidly over time in GB and is influencing major lifecycle decisions such as the ability to own a home and accumulate housing wealth.

The UK Social Mobility Commission published its annual State of the Nation report on 12 September 2023. This includes for the first time a section on housing. The key conclusion in this report is that –

Relative housing mobility – the link between parents’ home ownership and their children’s home ownership – has worsened consistently and significantly since 1991. This means that the link is now much stronger – parental home ownership is a better predictor of children’s home ownership. The link is also significantly stronger between women and their parents, than between men and their parents.

This trend is attributed to the relative increase in house prices –

Since house prices in the UK have risen faster than in many other countries, home ownership has become an important factor in wealth accumulation. This has created concerns about intergenerational fairness – younger people who are unable to buy a house won’t benefit from this accumulation.

The report includes two relevant statistics –

• Among people born in the late 1950s, 74% owned their own home even though their parents had not been homeowners. This fell to 49% of people born 20 years later in the late 1970s.
• People whose parents owned their own house are themselves much more likely to own their own house than those whose parents were tenants (71%, compared with 46%).

Jersey-specific evidence on housing and social mobility

There is limited Jersey-specific evidence on social mobility, and almost all of it concentrates on education and pre-school years. The Jersey Community Relation Trust 2022 publication Social Mobility Report is the most comprehensive study. It is silent on the impact of housing on social mobility. It is also the case that there is limited data which enables the impact of housing on social mobility to be measured.

In Jersey over a long period house prices have increased substantially in real terms. Between 2000 and the end of 2022, house prices increased by 141%, rents by 128% and retail prices by 102%.

House prices in Jersey are higher than in the UK and Guernsey. The most recent statistics (2023 Q2) for mix-adjusted average house prices are –

Jersey £666,000

Guernsey £546,000

UK £286,000

London £528,000

Other south east £391,000

What limited evidence there is shows that in 1990 Jersey house prices were no higher than in the UK. However, by 2011 Jersey house prices were 133% higher than in the UK and 49% higher than in London, broadly similar to the position in 2023. It therefore seems that in the 20 years up to 2011 prices in Jersey increased substantially more than in the UK.

Implications of housing market developments for social mobility in Jersey

Social mobility would be unaffected by a housing market in which all people in similar circumstances with regard to family composition and income were equally able to buy or rent housing, which means in practice without the support of or with equal support of parents or other family members. In practice, parents and grandparents have for many years helped their children and grandchildren with housing costs. However, if the circumstances are such that housing costs cannot reasonably be met without family support then clearly social mobility is adversely affected. Jersey seems to be in this position.

Some relevant data is provided by the Jersey Housing Affordability Index (JHAI). The most recent data is included in the House Price Index, Fourth Quarter 2021 report. The JHAI is an indicator of whether a working household with an average (mean) income is able to purchase an average priced house. The central assumptions through which the JHAI attempts to quantify housing affordability are:

• Mortgage payments (principal and interest) should consume no more than 40 percent of net income or 30 percent of gross income.
• The purchaser has a cash deposit of 10 percent of the purchase price.
• The purchaser is financing a 90 percent mortgage at a variable interest rate for a term of 25 years, with both principal and interest payments paid each month throughout the term.

The affordability indices indicate that during the period from 2002 to 2021 a working household with mean net income was not able to service a mortgage affordably on the purchase price of a median-priced house of any size at any time.

The report compares median property prices with median household income. Between 2002 and 2021 the ratio for two-bedroom flats increased from 7.1 to 9.1 and for two-bedroom houses from 8.5 to 10.1 – a rate of increase not significantly different from the UK. The ratio was higher than in all English counties except Surrey.

In comparing Jersey with the UK as a whole or with parts of the UK it is important to remember the point about Jersey being a small Island. In the UK people can live some distance away from their work. In Jersey this is not possible. If people cannot afford to live in Jersey, then they cannot work in Jersey. This is not true of central London or of other areas of exceptionally high house prices.

In practice for many Jersey households who do not qualify for social housing or for help towards rental costs it is not possible to buy, or in some case to rent, housing without the support of family members, which can take the form of –

• Outright purchase of housing.
• Contributing towards the cost of buying a property, typically by paying the deposit.
• Meeting part or all of rent or mortgage payments.

It is clear that many Jersey people benefit from such support. But it can be given only if family members have the means to do so and here the rise in house prices plays a role by increasing the wealth of owner-occupiers, which makes them more able or willing to support younger family members. There is no data on how important the “Bank of Mum & Dad” is in Jersey. However, there is some relevant data from the UK. In October 2020 the insurance company Legal & General issued a press release , which reported research it had carried out –

• 56% of first-time buyers aged under 35 received financial support from the Bank of Mum and Dad to help them step on the housing ladder.
• Nearly three-quarters (71%) of these new homeowners would not have been likely to buy without financial help from family or friends.

Another relevant study Who gives and receives financial transfers in Britain was published by the Institute of Fiscal Studies in February 2023. This reported that around 46% of those whose parents were graduate homeowners reported having received at least one transfer in an eight-year period compared with just 3% of those whose parents were graduate tenants.

So it is clear that the Bank of Mum and Dad is important in helping people meet housing costs, and particularly to become home owners. But many households are struggling to meet day-to-day costs and in no position to help children with house purchase, and tenants are more likely to be in that position than owner-occupiers. There is relevant evidence from the most recent Jersey Opinions and Lifestyle Survey report –

• 57% of owner-occupiers found it easy to cope financially, and 14% found it difficult.
• Of households in social rental accommodation, 24% found it easy to cope financially, and 46% found it difficult.
• Of households in private rental accommodation, 30% found it easy to cope financially, and 34% found it difficult.

The clear conclusion is that the operation of the housing market has worsened social mobility in Jersey. Those who bought a home many years ago have benefitted from the significant rise in house prices and have been willing and able to use the increase in wealth to help their children with housing costs, in particular to become home owners. However, there are two qualifications to this –

• Regardless of the nature of the housing market home owners are on average wealthier than tenants, although the nature of the housing market has accentuated this.
• Simply having a house that has risen in value does not increase income. But there is a “wealth effect”. The more wealth that people have the more confident they are in spending money or making gifts to family members.

This point can usefully be illustrated –

• In 2002 a typical household might be earning £37,000 a year, 50% more than average earnings. At a push they could buy a typical two-bedroom flat for £200,000 with a 90% mortgage of 4.9 times their income.
• In 2022 the earnings of the typical household would be £67,000 but the price would be £550,000, 8.2 times their income. This is unaffordable.
• But if the parents had bought in 2002, with an interest only mortgage, which would be cheaper than renting, they would have a capital asset worth £550,000, £370,000 net of the mortgage. Providing say £220,000 to their children and a mortgage of 4.9 times their income would enable the two-bedroom flat to be bought for £550,000.
• If the “typical household” was renting through this period they would have no capital from their housing and therefore much less ability to help their children purchase.

So in practice there is a two-tier market in Jersey –

• Those who can be helped by their parents to buy housing, those parents having acquired capital as a result of the rise in house prices.
• Those who cannot be helped by their parents to buy housing, those parents having been tenants and have therefore not acquired capital as a result of the rise in house prices.

There is of course another two-tier market, as a result of the requirements for residential status. Some people who have made a valuable contribution to the Island, for example in education or health services, have been prevented from becoming home owners, even when able to afford to do so, and therefore have not been able to benefit from the rise in house prices.

There is no Jersey-specific data to evidence this but it is reasonable to assume that the special nature of Jersey (a small island) combined with policies that have caused house prices to rise much faster than earnings has resulted in a significant increase in the wealth of those who have been owner-occupiers as compared with those who were tenants and that a proportion of that wealth is used to help their children become owner-occupiers, that demand helping to keep house prices high.

It is wrong to say that house prices generally are unaffordable – as they are paid. But is equally correct to say that if capital gains from housing are put back into the housing market through inter-generational transfers, then to some extent high house prices are self-perpetuating.

It is also worth noting here that the rise in house prices has effectively removed the beneficial effects of tax and benefit policies in reducing income inequality. This was the conclusion in the report Jersey Household Income Distribution 2021/2022 .

The benefits and tax system improve income inequality; housing costs almost remove this improvement. This effect of housing costs increasing income inequality has grown over the last 12 years.

The most commonly used measure of income equality is the Gini coefficient defined in the report as –

The Gini coefficient is an indicator taking values between 0 and 1, where 0 represents complete equality (all households have equal income) and 1 represents complete inequality (one household accounts for all the income). Therefore a reduction in the Gini coefficient represents a more equal distribution of incomes across households.

The Gini coefficient in Jersey in 2021/22 was 0.39 before housing costs and 0.43 after housing costs. Between 2009/2010 and 2021/2022 the Gini coefficient after housing costs increased from 0.39 to 0.43. The Gini coefficient was 5 percentage points higher for Jersey than the UK.

The report includes a comparison of the Gini coefficient in Jersey with that in European countries. Here, the only comparable variable was net income before housing costs. Of the 38 countries compared, Jersey ranked 36th with a Gini coefficient of 0.38, higher than the EU average of 0.30 and the United Kingdom at 0.34. Income inequality was greater only in Turkey (0.43) and Bulgaria (0.38). The figure for France was 0.30 and Germany 0.29. The countries with the least income inequality (0.25 or lower) were Slovenia, Slovakia, the Czech Republic, Iceland, Belgium and Norway.

Policy issues

The analysis in this paper demonstrates that the increase in house prices in Jersey has had an adverse effect on social mobility. This issue cannot be considered in isolation. Rather, there is a need for a joined-up approach across a range of policy issues in particular –

• The high cost of housing in Jersey has implications that go beyond social mobility – including the cost of living generally, the difficulty of recruiting, in particular for key services such as health and education, and young Jersey people being encouraged to leave the Island.
• Housing is just one of a number of issues that affect social mobility, and arguably not the most important. Early years provision and the education system are generally considered to be more important.

This section does not seek to make recommendations but rather raises a series of housing issues that merit consideration in respect of social mobility and more widely.

The issue of the high cost of housing can be addressed in two ways –

• Reducing the cost of housing.
• Using tax and other policies to redistribute the gains in wealth that have resulted from the increase in house prices.

Reducing the cost of housing directly addresses the issue and avoids the need for controversial tax and subsidy measures. In fact, the housing market is currently undergoing a correction for market reasons, primarily the rise in interest rates.

Although this does not yet show through in the official statistics it is clear that house prices have fallen by about 10% over the last nine months or so and there may be more to come given the huge increase in mortgage costs which has yet to be fully felt. The published statistics already show a 15% fall in real house prices since 2021 Q4. A number of UK experts are predicting a peak to trough fall in nominal house prices of between 10 and 20 percentage points and such figures are possible in Jersey. This would occur over say an 18-month period in which retail prices will rise by 15% so actually achieving a 30% real fall.

A reduction in house prices in real terms of 30% would go a long way to counteracting the adverse effects that the rise in house prices has had on social mobility. It would bring home ownership within the reach of many more people and would reduce the ability of existing homeowners to help their children become homeowners. However –

• In the short term high interest rates partially counteract the fall in house prices.
• There will be significant losers, that is people who have bought in the last three or four years who may find that they will have an asset that has fallen in value with mortgage costs having increased substantially.

There is little that the Jersey Government can do to prevent the reduction in house prices. But longer term it can seek to influence house prices

through changes to planning policies and practices, the release of surplus government-owned land to social housing providers and removing the current disincentives to downsize. There is also a case for considering the impact of tax policy generally on house prices. The tax system in Jersey favours capital gains over income, and unlike in the UK there are no instruments such as ISAs and venture capital trusts that enable people to build up savings free of tax.

It remains to be seen how far house prices will fall. There is a view that the nature of the finance industry, employing some 30% of the working population and paying relatively high salaries, will limit the fall in house prices. Whether this is the case will become clear over the next year.

An alternative to reducing the cost of housing is using tax and other policy measures to redistribute the gains in wealth that have resulted from the increase in house prices.

Taxing the increase in house values would directly address the cause of the problem, that is the rise in house prices. So, for example, a tax could be levied at say 50% of any capital gain in housing. This would be administratively difficult because house values also change as the result of repairs and improvements and also for many people the fact that their house value has increased does not give them any additional income with which to pay such a tax. A variation would be to levy the tax on property sales as is done in the UK for houses that are not a principal residence.

It is a matter for politicians to decide on such actions, but the political difficulty of taking any action must be recognised. A significant proportion of the Jersey population has benefited from the rise in house prices in relation to earnings such that they have a capital asset well in excess of what they could reasonably have expected many years ago and they are willing to use that asset to help put their children and grandchildren in the same position. It is also the case that those who have benefited from what has happened, that is older age groups and owner-occupiers, are far more likely to vote and to participate in public policy debates than those who have lost out, that is the young and tenants. In the 2022 General Election 57% of over 64s and 41% of owner-occupiers voted but only 17% of under 35s and 16% of tenants.

Another possible policy measure would be to compensate those who have not benefited from the increase in property values. So, for example, social housing tenants could be offered the opportunity to purchase their properties at a substantial discount, which might need to be as high as 50%, to put them in the same position as those who have been owner-occupiers. However, many such tenants could still not afford to purchase. An alternative would be to offer to transfer to them beneficial ownership of 50% of the value of their property with the condition that they pay a market rent to the social housing provider on the remainder. Such options merit detailed consideration.

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Appendix – social mobility project steering group

Terms of reference

• To oversee the Policy Centre’s programme of work on social mobility including –

o Commissioning external research

o Reviewing reports prior to publication

o Approving final reports.

• To report on the progress of the project to each meeting of the Centre’s Advisory Committee.
• To seek to secure funding for the project.

It is envisaged that individual members of the group will also participate in particular projects where they have expertise.

Membership

• Mark Boleat, Senior Adviser to the Policy Centre (Chair).
• Kate Wright, Jersey Community Relations Trust (Vice Chair).
• Dan Edmunds, Statistics Jersey
• Phil Romeril, Family Nursing and Home Care
• Patrick Lynch, Caritas Jersey
• Lesley Mourant, HR professional
• Sean Madden, Thrive
• Joanne Terry-Marchant, Highlands College
• Paul Rouse, Systematica
• David Stearn, Affinity Private Wealth
• Anna Terry, Jersey Community Foundation
• Kirsty Pearson, Economic Adviser’s Office
• Damian Warman, Premier Inn
• Ali Cambray, PwC

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