Is There a Trade-Off? Housing, Welfare and Pensions Reconsidered

A long running debate in the welfare state literature centers on an alleged trade-off between widespread homeownership and either a robust welfare state or a robust public pension. The central assumption in this literature is that homeownership front-loads housing costs, thus creating political sentiment against higher taxes for a larger welfare state. This paper questions the central assumption that buying is inherently more costly. Rather, the mechanism behind any observable trade-off is the need to reduce financial risks from mismatched maturities on bank balance sheets. Thus, the trade-off is not between homeownership and welfare (or pensions) per se, but rather between debt-financed homeownership and pay as you go pensions. The need to reduce maturity mismatch on balance sheets creates a rough continuum from societies combining high levels of mortgage debt with funded pensions (whether public or private) and societies combining debt free ownership with essentially pay as you go pensions. This finding also shows the weaknesses in proposals for asset-based welfare.