31st July 2019
Figures published as part of the latest Key Market Monitor Report have revealed that the equity release market experienced a comparative slowdown in growth during the first six months of 2019, with average loan values falling by £2,000 on figures for the same period of 2018 (to £76,064). Key have ascribed these findings to a number of adverse economic factors, with the subdued growth in house prices and the dip in property sales identified as contributing to an increasingly “cautious approach” amongst the over-55s. But, perhaps inevitably, it is the on-going uncertainties surrounding Brexit and the impact that the UK’s withdrawal from the European Union could have on prices and interest rates that is regarded as the biggest culprit for this modest reverse. And with Boris Johnson’s installation as Prime Minister seeming to increase the likelihood of a ‘no deal’ scenario, many within the property industry are bracing themselves for a turbulent period ahead. But, what are the implications of a post-Brexit decline in prices for the equity release sector?
Of course, attempting to reach a consensual view of probable Brexit outcomes (let alone a no deal Brexit) has become the very definition of ‘pointless exercise’ over the past few years, with politicians, economists and self-appointed experts of all shades and opinions conspiring to unleash a virtual tsunami of differing viewpoints and perspectives, most of which flatly contradict each other. So, it’s worth pointing out from the outset that a definitive article on the impact of Brexit and the equity release sector is probably beyond the capability of all but the most gifted of soothsayers. However, given the wealth of historical housing data that we have at our disposal, we can certainly measure the performance of house prices and markets against significant economic or political events of yore and use this information to draw a clearer picture of possible outcomes- a barometer, if you will, of shifting fortunes. Now, this isn’t an exact science of course, but what the data does seem to show is that UK house prices have consistently managed to salvage both momentum and growth from even the worst economic crises (not least the price crash of the late 1980’s and the financial meltdown of 2007-8). Indeed, according to the Credit Suisse Global Investment Returns Yearbook for 2018, UK housing has recorded a 1.8 % post-inflation return for every year since 1900, with no period in its modern history where prices have been lower than 20 years previously. And while growth has remained on a relatively subdued footing for the past 18 months or so, much of this can be attributed to the growing variations in regional house prices as opposed to simply Brexit.
For example, according to the latest property data from Zoopla, cities in the south of England registered their lowest rate of annual growth for seven years in June, with averages of 0.7% (or 0.0% in London) being recorded across the region. However, cities in Scotland, the north and the midlands posted above average growth for the same period, with house prices rising by 4% in Birmingham and 3.6% in the north- a reflection, according to Zoopla, of the superior balance between supply and demand in these areas. Moreover, as the decline in prices across London and the south east continues to impact on national averages, the question as to whether this worsening trend should be regarded as predictive of a likely post-Brexit scenario or as a corrective counter-balance to the untenable price growth in the capital over the past decade or so has become increasingly one-sided. Because, irrespective of Brexit uncertainties, the Zoopla figures clearly demonstrate that the property market is continuing to maintain a relatively decent rate of growth (albeit one which is skewed in favour of the top half of the country). And, while Mark Carney’s suggestion that post-Brexit house prices could fall by as much as 35% over three years is enough to strike terror into even the most stoic of observers, it’s worth remembering that this forecast was deliberately designed to test and exceed the worst possible outcomes of a Brexit withdrawal and that it represents a hypothetical timespan which is precisely double the length of decline witnessed in the aftermath of the financial crash. In other words, any short-fall in prices experienced in the aftermath of Brexit will inevitably be reversed.
Of course, that’s not to say that a dip in prices wouldn’t have implications for equity release customers. Any substantial reverse in market conditions would inevitably impact on the amounts that lifetime mortgage customers would be able to borrow against their properties. However, with more and more people choosing to take out drawdown plans (thereby minimising the amounts which they borrow) or to access the equity tied up in their properties to pay off existing mortgages (thereby driving up values and creating a financial buffer), there are more than enough options to counter the shockwaves of an unruly Brexit and to calm the nerves of anxious customers. Nevertheless, it’s worth bearing in mind that market confidence is invariably linked to prevailing tides of perception, and this means that advisers will need to keep their heads in the months to come and do all they can to separate fact from fiction. Because uncertainty has a tendency to breed more uncertainty and that poses a risk that cannot be contemplated. In the meantime, however, with a 5.6% upturn in annual plans and a 3% increase in total values recorded over the first six months of 2019, as well as a backdrop of historically low rates and a range of flexible products which is growing by the year, there’s a lot for the equity release sector to feel confident about moving forward.
