Ali Crossley is director of equity release plans at Prudential
Baby boomers were born in an era when they were told they had 'never had it so good' but as they near retirement, life could be turning sour for many.
Those born within 10 years of the end of World War II are now between 50 and 60 years of age and the older ones are nearing retirement. The good news for them is that they have experienced significant price inflation on their properties. On average this group paid £63,422 for their homes and in the third quarter of last year the average house price was £175,576 – an increase of some 177% since purchase.
However, this same group now faces a significant pension shortfall. Surveys of pension planning by the Pru show that on average people think that a pot of £115,000 will secure their expected level of income in retirement (£18,053 per year) whereas they actually need over £180,000 to reach this level – a shortfall of some £70,000.
So the obvious thing for these people to do is to sell their properties and release equity to fund the shortfall. But there is a timebomb which could wreck this retirement plan. It is going to become increasingly difficult to release enough capital from a house and still have enough left to buy another home.
Let's take an example using today's prices. The average house price is £175,000. If someone is to fund a shortfall of £70,000 they must buy another property worth £105,000. But this puts them head-to-head with the first-time buyer market where the average property in 2003 cost £109,336.
With around 357,000 baby boomers retiring each year between 2009 and 2019, this would equate to approximately 20% of the housing market and could have major impacts. First, an increased demand for smaller properties would see prices rise. Conversely, prices at the upper end of the market would decrease as supply increased. The first group to lose out would be the first-time buyers faced with higher prices at the lower end.
It is unlikely that there will be problems for the older baby boomers retiring first but as later ones try to sell they are likely to find that the value of their property has fallen whilst prices of cheaper properties have increased. And the more people that try to trade down, the worse it gets. The difference between selling and buying prices reduces and retirees find they must downsize ever further.
Instead of their ideal retirement they will end up in homes that are smaller or in poorer condition or worse locations than they either desired or are suitable for people in retirement.
The Pru believes that in order to halt the possibility of the property ladder becoming a property snakes and ladders game, home equity release will play an increasingly important role in retirement planning.
Dean Mirfin is business development director at Key Retirement Solutions.
In responding to predictions of possible housing havoc, we need first to look at the psychology of trading down by moving to a new home to release equity.
As the Pru's report rightly states, a move downmarket to release equity will normally involve the client moving away from their retirement dream.
At present those looking to release equity from their homes have a range of options to consider, one being to trade down. However, the reality is that many considering this option disregard it due to the movement away from their ideal as mentioned above. Other reasons include the psychology that makes people unwilling to move away from an area where they may have lived for most of their adult lives, or away from relatives or friends.
Another important consideration for those in retirement is their health and the healthcare that they receive, and moving out of area where their GP or specialist is based is not an option that many will consider.
Yet another barrier is the cost of transforming the property they move to into their home. Once the sums are done the costs – Stamp Duty, estate agents fees, furnishings and improvements – can have an impact on the real benefit of the move and the true level of equity that is generated.
The Pru report is certainly pointing in the right direction in its predictions. But our own experience at Key demonstrates that whilst people in retirement may look at using their properties to help support their desired standard of life in retirement, trading down is by no means always the route they eventually choose.
The psychological impact of trading down should not be underestimated. Many in retirement would rather stay where they are than move home with no guarantee of being happy and content with the decision they have taken.
In the years to come, if the scenario the Pru is predicting comes to pass, the the feared effects on the housing market may well become reality. But then, surely if the effect of these trends is to drive down the prices of larger properties then trading down would have little or no viability anyway.
An increasing number of baby boomers utilising equity release schemes rather than moving home could reduce or eradicate the problems feared by the Pru.
The equity release schemes currently available can often release the equivalent of – if not more than – a move downmarket. In addition, when passing wealth on is a consideration, the price growth on a more highly valued property can still lead to a greater inheritance value even after the scheme has been repaid.
I would be surprised if things turn out to be as bad as the Pru envisages.