A flurry of recent reports have found that around one fifth of UK adults aged 55 and over, approximately 4.2 million people, have less than £1,000 in savings. Even with interest payable on some saving account balances nearing 6%, such modest financial reserves could quickly come under strain should people need emergency cash.
This harsh financial fact is yet another source of nagging worry for many, yet the irony is that a sizeable number of middle aged and older folks own (often mortgage-free) homes that have appreciated in value beyond theirs and everyone else’s expectations.
Thirty years ago, just over half (56%) of adults aged 65 and above owned their home outright, ie without a mortgage; today, the percentage of outright homeownership among the same cohort is almost three-quarters (75%).
Admittedly, the latest Nationwide House Price Index (HPI) shows that average house prices fell by 1.4% in the second quarter of 2023. However, when we consider the bigger picture, it appears considerably more favourable: since January 2005, average house prices have risen from £152,790 to £261,995, an increase of more than 71%. For many people, that additional, albeit notional, sum of £109,205 is locked away in their home in the form of equity; for those with modest financial reserves, the situation is a classic example of ‘asset rich, cash poor’.
For those whose savings may be modest (as well as for others who would like to access the wealth locked within their bricks and mortar), equity release offers access to an untapped source of tax-free cash. Indeed, it is estimated that up to one third of sixty-somethings plan to use property as part of their retirement planning.
Listen to the gloom and doom merchants for any length of time and you could be forgiven for thinking that as interest rates have surged, so the property market has crashed, thereby dashing any plans people may have had to release equity from their most valuable asset, primarily because its market value has plummeted while interest rates have moved steadily upwards.
To add some perspective, however, let us consider the Nationwide’s HPI in a little more detail. It tells us that in the 13 weeks to 30th June 2023, property values fell by a total of 1.4%. It’s worth noting that this fall equates not to tens of thousands of pounds but to an average, and slightly less headline-grabbing £286.15 a week.
Most long term homeowners have grown accustomed to the fact that appreciation in property values is a gradual phenomenon. Part of the excitement most of us felt when buying our first home was a sense that we were ‘on board’ and would now benefit from steady increases in property values; occasionally they could be significant. But only a fool would bank on values rising by a guaranteed 10% every year over, say, 15 years. Similarly, it would be unreasonable to expect values to tumble by an equally large amount every year for, say, a decade. To summarise: property values undulate; they neither rise nor fall in dramatic, straight line fashion.
Ah, you say, but hasn’t the property market crashed this time? Actually, no, it hasn’t. Figures published by the finance website LoveMoney show that in several areas, such as the North East, where average values have risen by 4.7% over the past 12 months and the North West where property values increased by 3.5% to the end of August 2023, prices continue to edge upwards. None the less, we appear to be in the midst of a property cycle during which house prices tend on average to move sideways.
According to property writer George Dibb, the UK (and global) property market is driven by what is known as the ‘Property Cycle’. In other words, the property market “conforms to a repetitive and historical sequence of events which can be categorised. The Property Cycle is not unique, it ties in with the business cycle, credit cycle and a general theory of economic boom and bust.
“Historically, whilst the Property Cycle has proved to be a useful tool for… understanding different periods within the… market, few people have been able to use the theory to predict property prices. One of the few credible theories… which claims to do this is the 18-Year Property Cycle.”
The theory was first mooted by Fred Harrison in 1998 when he predicted the 2007-08 financial crash. In 2005, he published a book, Boom and Bust, which argued that the UK property market follows an 18-year cycle. To support his argument, Harrison demonstrated how the 18-Year Cycle was evident over two centuries of UK house price data. The most recent market crashes of 1953-54, 1971-72 and 1989-90 all lent support to Harrison’s claims.
There’s little need to explore Harrison’s theories in great depth, but it is clear that they confirm what most longstanding homeowners already know: that while property values appreciate over the longer-term, it’s equally certain that the market will periodically experience some choppy waters. Home ownership is rarely a smooth ride.
Should this fact of property-owning life deter people from considering the benefits (and potential disadvantages) of understanding how does equity release work?
Older people who might be on the cusp of retirement and perhaps concerned about their existing level of savings, or mindful of the ease with which the state pension Triple Lock could be ‘amended’, as my previous column suggested, will be understandably keen to explore methods by which they could supplement their retirement income. For example, while researching this column, I spoke with one very satisfied fan of equity release plans who withdrew a tax-free lump from her home earlier this year. “It was akin to discovering savings you never knew you had,” she exclaimed.
Thousands of others have experienced a similar discovery, using the newly found ‘savings’ to supplement their retirement income; pay off an outstanding mortgage; undertake some much-needed home refurbishment, or help loved ones get onto the property ladder.
Chairman of the Equity Release Council (ERC), David Burrowes, hit the nail on the head when discussing the cost of living crisis. Mr Burrows said: “After years of putting money away in bricks and mortar, older homeowners are turning the tables and taking funds from their homes in order to boost their retirement income, meet one off costs [or] gift a living inheritance to family.”
Equity release is not for everyone, but it is one way in which older homeowners can mitigate financial worries, offering them the means to access life-changing sums of money and manage their retirement finances.