Life in a Flat Market

The perceived theory that as one gets older, one gets wiser, is certainly something I would agree with as the years progress. Perceived theories however, although often widely regarded, are always worth challenging, especially in matters relating to finance and property, where opportunities are constantly evolving. Old pieces of wisdom such as “sell in May, go away, come back St Ledgers day” have certainly proved outmoded. A more recent piece of wisdom, “it is better to trade down a property than to engage in equity release” I feel deserves closer scrutiny.

The theory is certainly compelling; especially in a rising market when the additional finances that can be accessed from selling a property could actually prove to be a significant gain on the initial investment. These benefits though erode quickly in a flat or declining house price market. After the recent house price boom there has been great speculation that the housing market is due for a correction. Thankfully this now appears not to be forthcoming. Housing prices have remained relatively steady and the major players are anticipating this to be a continuing trend. However the major house price commentators seem agreed that any future gains will be limited to the level of general inflation – there will be no real increases.

However in a flat market the cost of moving will still rise. Currently for an average property the cost of moving, including costs such as solicitor fees and stamp duty can easily exceed £15,000. The effect of trading down, buying something smaller and pocketing the cash difference, means that a property may have to be considerably smaller, or in a different geographical area where it is possible to get “more bang for your buck.” In addition with the relatively high price of sheltered accommodation such a move may not be possible at all.

This perceived wisdom of trading down has with it many “soft” drawbacks. There are many emotions involved in moving home. Uprooting away from friends and family can be very traumatic, especially if someone has been in a property and area for a long time. Having to re-start in terms of making new friends and acquaintances, building community ties and gaining local knowledge when you could well be in your seventies is a tall order. Trading down also means that people are realistically going to have less space for their belongings, potentially calling for a ruthless re-evaluation of ones long held possessions.

So what is the alternative? Phil Veale, development manager for Age Concern Enterprises, said recently "many children actually recommend equity release because they want their parents to be able to stay in their homes.'' Equity release products allow for individuals to remain in their own homes, whilst accruing financial flexibility that they otherwise would not have. There is a much maligned view that equity release is a slightly tawdry business that does not treat the customers with an even hand or as fairly as ought to be expected. Customers for equity release products are often regarded as the most vulnerable section of society and with this in mind, complicated financial products are frowned upon.

These attitudes have at times been unfairly fuelled by the press. When I recently met with Which? in the wake of their report on equity release, we both agreed that it was vital that equity release products need to be sold with direct advice to the end consumer. Selling through IFA’s means that every customer should receive the care, attention and full explanation to ensure a clear understanding of what is involved.

Negative press has dogged the market. Accusations of mis-directed advertising have added to scare stories of poorly or irresponsibly used funds from release schemes, leaving people with unanticipated financial burdens. Arguments that the industry encourages people to live a dream lifestyle they cannot afford are not fully justified. The spending of money released from a property on a holiday is certainly a popular option, but it stands well behind people using equity release for the purpose of home improvements. This in itself emphasizes the point that older people actually do not want to move from their properties into smaller homes, but would much rather stay where they are and improve their general surroundings. The majority of misconceptions surrounding equity release stem from a misunderstanding of it.

Ordinary mortgages enable you to live in a property while you buy it. Equity release is just the flip side of this; in that it allows people to continue living in their home after they have sold part of it. As an industry there has been a consistent call for greater education of the products available and a general demystification of the processes involved. Using property as a leverage for personal funding is certainly not unusual. Simon Rubinsohn, an economist at City brokers Gerrard, reckons that homeowners withdrew £51bn out of their homes in 2004 and £32bn in 2005.

The entrance of high street banking names into the equity release arena is an indication that this market will continue to grow. Due to the very nature of the products however the growth will be slow as these institutions learn the sales process. In that regard it is interesting that HSBC has sub-contracted customer advice.

The equity release market offers a viable solution to those who would rather not undergo the option of downsizing. In a market where house prices look to remain flat the attractiveness of downsizing becomes far less appealing, especially when there is the option to release equity and still remain in your property. It should also be noted that downsizing after taking out a lifetime mortgage could be problematic as there might not be enough equity to allow the purchase of the desired property and so customers will need careful advice once their plans have been formulated.

The industry as a whole will only benefit from the increasing trend towards greater flexibility and fairness. Improved regulation and education will encourage more entrants to the market, both in terms of product providers and customers. The FSA has already run its slide rule over the industry and long awaited guidelines on reversions are expected soon. In my mind this is certain to inspire more people to contemplate challenging received wisdoms.

www.retirement-plus.co.uk

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