The UK population has always been fascinated by residential property. Owning it, selling it, making a profit from it and now even relying on the equity within it to finance part of their retirement. But with certain pundits declaring that the property market will grow at a slower rate over the coming years, and the various scares the financial services industry has suffered over equity release, just how healthy is the market?
If you look at the quarter one (Q1) figures in the Key Retirement Solutions Equity Release Monitor, the answer is very healthy indeed. We have seen a substantial increase in the number (plus 22 per cent from Q1 2005: 5,795 to Q1 2006: 7,087) and value (plus 12 per cent from Q1 2005: £277 million to Q1 2006: £310 million) of equity release plans sold year-on-year. This is a significant annual increase and, without wishing to sound overly optimistic, bodes well for the remainder of 2006.
However, the trend towards a slight dip in Q1 continued as the value (Q4 2005: £313 million to Q1 2006: £310 million) and number (Q4 2005: 7,128 to Q1 2006: 7,087) of equity release sales fell slightly quarter on quarter.
The split between the various types of equity release products sold has changed dramatically from Q1 2005 to Q1 2006. Drawdown plans now account for more than half (53 per cent or 3,760) of sales, which is a significant increase from 12 per cent (718) a year ago. The increasing popularity of these products is unsurprising as they currently boast excellent rates and allow consumers to access the equity in their homes in phases – therefore reducing the overall cost and adding an attractive ‘lifestyle’ aspect to these products. We anticipate that drawdown mortgages, provided their competitive pricing is maintained, will continue to dominate the market as consumers realise their benefits.
The relative popularity of reversion schemes has remained low and they accounted for only 6 per cent (416) of plans sold in Q1 2006. This trend is likely to continue, although if the perception that the market is due to slow significantly grows among consumers, we may see increased interest in this product type.
The number of plans sold by intermediaries rose marginally (Q4 2005: 4,012 to Q1 2006: 4,093) as direct business fell (Q4 2005: 3,115 to Q1 2006: 2,994). This increase is good news for the equity release sector as it indicates that consumers are increasingly understanding the benefits of seeking independent financial advice when choosing to take out these products.
Cause for concern
However, it is interesting to note the disparity between the value of equity release plans sold by intermediaries and those sold by the product providers themselves. We have noticed that large companies are increasingly targeting their own more affluent customer bases for equity release sales and tend to sell dramatically fewer drawdown mortgages.
This could be a real cause for concern in the future if the current trend towards direct products, offering less competitive rates, continues. Product suitability and pricing are so sensitive in this market that it is important customers taking out these products receive unbiased independent advice on all equity release products before making their decisions.
The regional picture has changed very little quarter on quarter with the South East (value: £77 million and number: 1,435) continuing to boast the highest number and value of plans sold among all the regions. The only regions to record substantial increases in the value of plans sold were located in the South of the country – East Anglia (plus 34.73 per cent to £30 million) and London (plus 22.80 per cent to £31 million). These increases seem to indicate that Southern retirees, who have generally faced a higher cost of living and therefore have found it more difficult to save, are more eager to cash in on the value of their greatest asset – their home – than people in other regions.
A sharp fall
However, the North West – while still in the top three equity release regions – has suffered a sharp fall in the number (minus 19.63 per cent to 1,068) and value (minus 23.85 per cent to £36 million) of plans sold. The North West may well have seen a period of levelling off, however it still maintains a strong position following strong house price increases.
So all in all, Q1 2006 has shown healthy growth pushing the number of outstanding plans to 125,800 at the end of the period. If this quarter’s figures are an indication of how the market will perform over the remainder of the 2006, it seems that we are in for a good year. It will be interesting to see if this expansion comes from companies already in the market or if more new entrants brave these waters.
