Dean Mirfin gives an analysis of the growth in the equity release market and a UK regional breakdown of the current take-up of this increasingly popular product
The equity release market has grown at record levels over the past few years with outstanding equity release plans now valued at more than £3.9 billion1. This growth can be largely attributed to developments in the present housing market as well as the current socio-economic climate.
Driving forces
During the past 30 years, house prices have increased substantially as has the number of people who own their own homes. In 1974 the average property was worth £11,276 but that same property would be worth £178,720 at the end of 20042. Following this tremendous rise, the nation’s retired homeowners now have over £1 trillion of equity in their homes. This is an increase of around £444 billion or 75.32 per cent since 1998, when they had £589 billion worth of equity1.
In sharp contrast to this positive growth, many of today’s pensioners have seen the funds they have put aside for their retirement shrink. Increasing longevity, diminishing stockmarket-based private pensions, group schemes collapsing when companies go bust and the basic state pension paying just £79.60 per week3 have all contributed to this gloomy picture.
Pensioners’ income
Inflation is also putting further pressure on pensioners’ income. Our research has shown that over the past 10 years the cost of living has risen more quickly than the income of the average pensioner. While the increase in the cost of basic items such as groceries and medical prescriptions has not exceeded the growth in pensioner income, the cost of running a home has increased dramatically.
Since 1995 the income of the average pensioner has risen by 26 per cent from £11,440 to £14,404, but Council Tax has increased by 101 per cent. The cost of repairs and maintenance has also soared by 88 per cent in the last 10 years. Other figures also show that there is an increasing number of pensioners who are facing mortgages and personal debt well into retirement. And it is estimated that the over-65s currently owe more than £8 billion4.
At the same time as facing these financial difficulties, today’s pensioners are looking to get more out of their retirement than previous generations. Recent research5 revealed that only 15 per cent of those aged between 50-59 feel they have achieved all they want from life and if money were no object 53 per cent of over-50s would travel abroad more.
Current market outlook
Many over-65s are therefore facing retirement with high expectations and substantial capital in their property but very little actual cash. This is leading to steady growth in the equity release sector which people choose as a viable solution to this problem.
Our analysis of the market for the final quarter of 2004 serves to further confirm this, showing a 3.5 per cent increase in the total value of plans taken over the previous quarter – a rise in value from £372 million to £385 million1.
Regionally, the South has traditionally led the rest of the United Kingdom with regards to housing trends. Therefore, the phenomenal growth in the value of new business in 20041 in the Northern regions - Northern England (143 per cent), Yorkshire and Humberside (88 per cent) and North West England (56 per cent) – shows that equity release is gaining general acceptance.
By comparison, in the South West, South East, East Midlands and East Anglia, the value of new business was lower in 2004 than in 2003 (-12.1 per cent, -9.7 per cent, -11.3 per cent and –6 per cent respectively). This illustrates the affects of slowing house price inflation in these regions.
Consumer confidence
The rise in equity release schemes taken out over the past years has been in line with a growing consumer confidence over the same period. Research6 reveals that consumer confidence in the market has nearly doubled in the last three months of 2004 and a quarter of those over-55 would now consider equity release.
This increased trust no doubt reflects the regulation of lifetime mortgages by the FSA, which came into effect on 31 October 2004 as well as Safe Home Income Plan’s (SHIP) tough new Code of Practice for reversion schemes – introduced at the same time.
Market outlook
The outlook for the equity release industry is undoubtedly positive. Not only are the socio-economic forces which drive this sector likely to continue to be a factor influencing demand but experts are also predicting an increase in product providers. This will benefit customers as these companies will be forced to develop innovative products in order to compete with established names. This will in turn push existing providers to re-think their existing strategy and match new product developments to retain a competitive edge.
Dean Mirfin is business development director at Key Retirement Solutions
Sources
1 = Key Retirement Solutions Equity Release Monitor – 31 January 2005.
2 = Council of Mortgage Lenders.
3 = Department of Work and Pensions 2004/05.
4 = Research undertaken by Key Retirement Solutions.
5 = Norwich Union.
6 = Prudential Equity Release.
