Equity-release provider Home & Capital has raised analysts’ eyebrows by warning that house prices could fall by as much as 30 per cent in some areas.
Sales director Nigel Hare-Scott advised homeowners looking to release some of the value of their property to do so sooner rather than later to mitigate the impact of such a drop.
The effect of a fall in house prices would be a reduction in the amount of loan capital for people aiming to arrange a home reversion or lifetime mortgage plan, says Hare-Scott.
He says: “Property is a commodity like any other. We cannot pretend that it will continue to increase in value forever. I would not be surprised if there were falls of up to 25 to 30 per cent in some parts of the country.”
The downturn, he explains, could be caused by uncertainty in the market, high interest rates, increased unemployment and the potential for a recession to hit the UK.
Interest rate rises, affordability problems for first-time buyers and growth outstripping salary increases have contributed as catalysts for a slowdown in growth this year, says Halifax group economist Tim Crawford.
He says: “Over the past five years. salary growth has been under 20 per cent but this has been outstripped by house price rises of more than 50 per cent in London and the South-east and 100 per cent in the North of the country.”
As property prices have risen, the equity-release market has benefited from significant growth in recent years. Over 14,000 new equity-release plans totalling 596.2m were sold in the first half of this year, according to trade body Safe Home Income Plans.
The total number of new equity-release plans sold in the second quarter of 2007 was up by 16 per cent year on year to 7,439 from 6,417 in 2006.
The amount of capital that can be withdrawn from a property with a lifetime mortgage or home-reversion plan is calculated, in combination with looking at age and life expectancy, as a percentage of the value of the property.
Retirement Solutions business development director Dean Mirfin says: “You may have a property worth 250,000 for which you are able to access a maxi-mum of 100,000. If you only need to access 20,000, then changes in property prices will have a negligible impact but if you need to raise 100,000, you may be stuck if the value of the house falls and the percentage available reduces.”
Mirfin says that one in five of people who take up equity-release products rely on lenders that offer the highest loan to value and these people would be most affected by a downturn in the market.
He says: “If you have a roll-up loan, for example, and the amount that you owe is building up every year then if your property value falls in value you are endangering the rest of the equity in your property.”
Retirement Plus managing director Duncan Young says homeowners should be wary of making a hasty decision.
He says: “Many products are flexible, featuring low or no redemption penalties, but some are irreversible. You need to beware that you are locking yourself into a product which you cannot get out of.”
Young points out that if property prices continue to rise, homeowners who take out a plan now would not be getting the maximum loan possible from the property. But, most important, he says that a rushed decision may mean not taking out the most suitable arrangement for the client.
He says: “Equity release is not simply about house prices. Those considering a home equity plan need to carefully consider what the loan is for, whether moving to another property would be a better alternative, whether they are eligible for any other grants, loans or benefits and what are possibilities for remarriage, cohabitation and potential care needs.”
Many analysts consider that there is little risk of the kind of falls in property prices predicted by Home & Capital.
Halifax’s latest monthly house price index forecasts 6 per cent growth in house prices for this year, up on the 4 per cent it predicted at the start of the year. House prices rose by 0.7 per cent in July.
Crawford says the revision, is due to greater upward movement in prices during the first quarter caused by a healthy economy, relatively low interest rates, a strong labour market and mortgage serviceability rates still close to average.
He says: “This supports the view of a settling of the market rather than anything else. We anticipate that prices will steady rather than fall.”
Mirfin says there is always a danger in speculating when it comes to equity release. He says: “When we talk to customers, the number one priority is to ask them what they think. You have to be very careful when offering any predictions on whether their property value is going to go up or down. If your prediction is wrong, have you really helped the client?”