Stuart Wilson from Air Club casts his eye over the economy and its impact on later life borrowers
The following article was supplied by Air
At the moment, and given the uncertainty we are currently seeing right across the financial services sector, I can’t help twist the words of Tony Blair into what is undoubtedly the most important issue for most of the UK public right now – it’s the ‘Economy, economy, economy’.
Or to hark back to 1992 and the US presidential race between Bill Clinton and George Bush Snr, that pithy slogan often deployed by the former’s campaign strategists when pressed on what was the number one issue, “It’s the economy, stupid.”
Certainly, there is no doubt in my mind that in political terms the next General Election is going to be won – and undoubtedly lost – in great part by what sort of state the economy is, and of course the Government’s success (or otherwise) in tackling its economic-based pledges.
Namely, halving inflation by the end of the year, growing the economy, and reducing the national debt. And, if you were someone who liked a bet, the painful truth for the Conservatives at present is they don’t look like achieving any of those three, and that’s before you add in their other promises – cutting NHS waiting lists and ‘stopping the boats’.
At the heart of this – at least from my perspective – is the almost total focus on bringing inflation down, which is somewhat ironic because of course the Government itself can only influence one part of the ‘solution’ to this, namely fiscal policy.
The other is monetary policy, completely out of their hands and comfortably under the remit of the Bank of England, whom you might well argue, has had ‘limited’ success in the strategy it has deployed up until now. It is the stubborn nature of inflation and the seeming lack of confidence in the Bank’s ability to bring it down, which is having such an impact in terms of interest rate levels/expectations.
At our recent Air Later Life Adviser National Conference, Hansen Lu, Senior Economist at Aviva gave delegates a fascinating, whistle-stop tour through the current state of the UK economy, and one point stood out in terms of inflation and just how long it might take to be brought under control.
Lest we forget that the Bank’s inflation target is 2% or under, and the last figures we have for May revealed that CPI inflation was 8.7%, which was unchanged from April, while ‘core inflation’ - which doesn’t include the price of energy, food, alcohol or tobacco - actually increased from 6.8% in April to 7.1% in May.
Hansen pointed out that while the UK economy is weak, it is still effectively too strong to allow inflation to come down. For example, at the tail-end of 2022 the expectation was that we would have a recession this year, but it’s not happened, and therefore the spending power of many consumers – given the high levels of employment we have – has meant that large numbers have been able to keep on spending even when the prices they have needed to pay for goods and services have gone up, often quite considerably.
It's perhaps why there is so much talk about the Bank of England ‘engineering a recession’ through the tail-end of 2023 into 2024. The priority will be getting inflation down over improving growth, and this will see much higher interest rates, increased unemployment, an impact on more people’s incomes, a fall in spending power, and ultimately inflation coming down.
To a layman such as myself it seems like a risky tightrope to be walking along, and of course there is going to be a sizeable impact on the housing market and borrowers should rates continue to rise to perhaps 6/7%. But again, that might be the only way the Bank feels it can move the inflation dial.
Of course, later life advisers will know only too well the impact an inflationary environment can have on older consumers, not least because they are less likely to be in a position to bring in more income in order to offset rising costs. Inflation running at only just less than double-digit figures can be debilitating for many older consumers’ budgets.
That is part of the reason why, in terms of later life lending demand, we’ve seen a move away from consumers looking at options because they want to fund more lifestyle-based purchases, to one where they have a deep-seated need for this type of lending in order to pay off debt, or to bring in more money to deal with the cost of living issues they are having, or indeed a combination of both.
From my perspective, that customer need is not going away anytime soon, especially for older homeowners who might be sitting on sizeable equity levels in their current home, with no means of adding to incomes other than accessing that value. Part of the question we need to ask though is around funding appetite and the cost of loans in the face of potential increased demand.
We as later life lending stakeholders, have to acknowledge the impact that is being felt on our lenders/providers in terms of funding products, and of course the rates available on, for example, equity release plans. Not forgetting, what has happened to house prices (on average) over the last year, with most suggesting that values will continue to dip lower. How does both of thrdr play in the market for those customers who have a growing need to access their equity to fund debt/monthly living costs?
Let’s be honest here, it is a tricky square to circle, and advisers need to be absolutely clear with clients about the current economic situation, how it impacts our sector specifically, and what that currently means for the costs of taking out a later life loan, particularly if they are not in a position to service some or all of the interest.
Overall, we still have pretty strong product choice available, and I know lenders/providers are working hard to offer more solutions. What is important for advisers is that they continue to offer alternatives where available, and the client is left in no doubt about the advice, the recommendation and what they are signing up to. This is a tumultuous period for our economy and the last thing we want to do is make it any worse for our clients.
Stuart Wilson is Chairman at Air Club
