£1 will always be worth £1. If you devalue £1 you still have £1. That is the point Harold Wilson tried to put across when attempting to sell the devaluation of sterling to the British public. He conveniently overlooked that if measured in US Dollars or French Francs, £1 was worth less.
The world was a lot less globalised in 1967, so it was worth the political punt. Hopefully no politician would treat the British public as being so naive today. They are now used to the effects of currency movements on the cost of their holidays and the price of fuel at their petrol station.
In these turbulent times we see the value of our pensions go up and down like yo-yo’s. Most of the assets we hold in our pensions are traded through market makers – people who buy and sell the stocks and bonds we hold.
At any moment in time, the market makers set the price they are willing to buy and sell at. They take a view of what the latest economic or company data means for a particular stock or bond. Generally, news that will reduce growth in the economy will mean a reduction in value of stocks. However, if the authorities try to stimulate the economy through reduced interest rates or fiscal stimulus, the value of stocks rises. Bonds values also rise as investors respond to lower redemption yields.
Where there is not a market maker, the price of an asset can be more a lot more unpredictable. Antiques and works of art can be influenced by many factors including fashion. At the end of the day such assets are worth what someone will pay.
Another area where there is not a market maker is the housing market. We see data that provides national, regional or even post code changes in house prices. At the end of the day, if you are a seller, what you receive is what a buyer is prepared to pay.
A few years back a friend was buying a house for his son and family who had to move to another part of the country for work reasons. A property was empty allowing an immediate move in an ideal location. Two other buyers were willing to pay the asking price. The agent asked each of the buyers to provide a sealed bid. My friend secured the property by offering more than what he thought the others would be willing to pay. Even at that price he felt that economically he had got value from the house purchase.The seller was lucky they found the perfect purchaser for the house they were selling.
We are in unusual times. The government has as good as closed down the housing market for three months if not more. What will the market be like when things return to normal?
To answer that question, we need to understand how many buyers there will be and how many will sell. Without doubt the economy will retrench, this and lenders’ caution will cause house prices to fall. Before the closure we were already seeing lenders withdraw their higher LTV mortgage products. It will need a return of lender confidence in valuations before they return. This is important as many potential buyers may use some of their savings for a deposit during the crisis.
Will sellers expect to sell at pre-virus prices? If they are disappointed, will some quickly withdraw from the market?
It may take a few months if not longer before the true number of realistic buyers and sellers becomes known, valuations stabilise and the market can move forward. Whatever this means for the various house price indexes, one thing remains. For a particular house its value is what someone will pay to buy it.
The equity release market also depends upon house valuations. We may see an uplift in demand for equity release caused by those living off income drawdown worried about the impact of continuing to draw income on the value of the investments they are drawing down from.
The house value will influence the risk the lender is taking on by providing no negative equity or inheritance guarantees. In the absence of a reliable valuation, the lender may need to be able to make a conservative judgement on what the property’s value is.
This may not be helpful to those who require a large lump sum. However, for someone who wants to substitute income while giving their income drawdown portfolio some respite this may not be much of an issue.
So, an advance to cover three years’ income of £50k will take 21 years before that loan has reached £100k, assuming 3.5% compound interest. Even if house prices drop 50% after 21 years of recovery, very few houses will then be worth less than £100k.
If equity release can be used to protect the sustainability of an income drawdown portfolio, what value does that make the house worth to its owner?
Bob Champion is chairman of the Air Later Life Academy