Key has published its UK Equity Release Market Monitor for 2019. The headline from it is that after several years of double-digit growth, equity release transactions in 2019 were slightly lower than in 2018. Why should this be?
After all, the reasons for using equity release have not changed. Older people want to make improvements to their gardens or go on holiday. Debts and mortgages have to be paid off or more cash is required to meet regular bills. Parents and grandparents still want to help their children and grandchildren get on the housing ladder.
Among the working population, fears about job security or reduction in disposable income can affect consumer confidence. They therefore hold back before making long-term financial commitments. This should not be the case with older people most of whom have retired.
Equity release interest rates continued to reduce to record lows during 2019. In many ways, there has never been a better time to take out an Equity Release Plan. It’s also not my belief that the equity release market has reached its optimum size. So why was 2019 not another year of double-digit growth?
Looked at regionally there is a mixed picture – some regions galloped ahead, while others fell back. Northern Ireland, Wales and the West Midlands all saw double-digit percentage growth in advances and close to that in the number of plans taken out. The South West, South East and East Midlands all saw a significant reduction in both advances and plans. While London and East Anglia saw a reduction in advances with a small reduction in plans and the North East had a minimal change in advances but a sizeable reduction in the number of plans.
Could house prices be having an impact on the equity release market? Higher house prices could mean downsizing has an increased attraction, seeing that the differential between larger and smaller should in cash terms increase. On the other hand, the emotional desire to remain where you are the longer you have lived in a house and the older you get will still always be in play.
Also increasing house prices combined with low rates of interest should give more confidence about the impact of equity release on the residue equity in the home. There does not appear to be a correlation between house prices and the equity release data. According to the latest Nationwide data, Wales and West Midlands saw a pick-up in house prices as did Northern Ireland over the early part of the year. However, house price data in the South West is just as robust.
There is no good reason why changes in the housing market should reflect what happens in the equity release market. If equity release is being used by the Bank of Mum and Dad to help get children on the housing ladder, then lower house prices and low interest rates should give that particular segment a boost. In other words, ‘get on the ladder while prices are low’. If they are increasing, larger deposits are required to obtain the better mortgage deals.
I think we can therefore dismiss housing market activity as the reason why growth stagnated slightly in 2019.
Outside housing, the majority of the wealth of older people is held in pensions. Pension Freedoms have only been in place since 2015. Those who have retired for a few years or more will be dependent on defined benefit pensions or annuities for their income. Increases in asset values will therefore not impact on them. Low inflation may mean that those with guaranteed fixed increases may feel slightly better off.
The latest pension freedom withdrawal statistics indicate that the average withdrawal reduced over in 2019. There is no obvious reason why growth in the equity release market should come to a halt in 2019, plus as mentioned, the market is a long way off its optimum size.
When we are working as individuals, we are a utility. We generate income through our work from which we spend and save the balance. Those savings aggregate to build our wealth. When we retire, we live off that wealth. If we are fortunate enough to own our home, that forms part of our aggregate wealth.
Most of the naysayers – who for many years highlighted the poor equity release products of many years ago – now recognise the role that modern equity release products have in retirement planning.
Many pensioners who own their own homes are struggling to make ends meet. Using some of their housing wealth could improve their retirement. We need to make sure we continue to get that message across.
Bob Champion is chairman of the Air Later Life Academy