Reality checks

When it comes to predictions for the future of the equity release market, my thoughts are that it is likely to be a curate’s egg.

On the plus side, I am convinced that the market has turned a corner in terms of volume of sales of equity release products. This view is due to a number of factors.

First, it is based on soundings I have taken from advisers on the numbers of enquiries they are receiving. Many are starting the year with a healthy business pipeline.

Many firms have become much savvier in terms of their lead generation and many are focusing on introducers who have relationships with customers who have consumer needs that equity release products can satisfy such as debt repayment, moving home, gifting to family and even divorce settlements. There is no doubt that the demand is there, the trick is to package equity release as a solution rather than a product.

But the other side of the coin is the correlation between house prices and equity release sales. When consumers are feeling optimistic about future house prices, equity release volumes are higher.

I am not saying this is the only cause of the slowdown in sales from 2008 but it is a contributory factor. Naturally, in a rising house price environment, a lifetime mortgage (with its almost open-ended commitment by the borrower on the amount of debt to be repaid at the end of the term) may seem very attractive. But the reality is we have been in a negative or relatively flat house price inflation environment for four years and there is no sign of this changing in the short or medium term.

Indeed, the outlook for the coming year is not encouraging, with the euro crisis far from being resolved, many of the Government’s austerity measures still to bite and mortgage funding still scarce. That is before we think about a possible structural shift taking place in the UK housing economy – moving from homeowning to renting.

Now I may be sounding like a doomsday merchant but I believe that advisers will better serve their clients if they directly highlight the risks associated with house price inflation.

I heard a good saying recently which is highly relevant: A pessimist hopes the wind will change, an optimist believes it will change but the realist changes his sails.

Too many clients are optimists, in denial about the future value of their greatest asset.

It is only natural as all of us who are property owners have a vested interest in a positive future for house price inflation but I would argue that true advice is not about playing to the clients’ emotions but rather drawing clients’ attention to the possible risks and rewards of a proposed course of action.

Testing customers’ assumptions on house prices to ensure they are realistic is vital as it is so crucial to the ultimate product choice.

The most suitable product needs to be the one that mitigates the greatest risks and unless clients see these risks for themselves, there is a danger that the advice is not truly aligned to the customers’ needs.

Peter Welch is head of sales and distribution at Bridgewater Equity Release