Warning to over bullish financial advisers over equity release in UK

Equity release advisers ought to tone down their assumptions over future levels of house price inflation as too many have been overly bullish when it comes to their own house price predictions resulting in clients being recommended potentially unsuitable lifetime mortgage products, it is claimed.

Bridgewater Equity Release, the home reversion specialist, said it is concerned that those clients who have, and are, being recommended lifetime mortgages could be opting for the products based on their adviser’s house price assumptions.
 
Bridgewater analysis has revealed that predictions of 8 or 9% annual house price growth are based on periods when there were considerable inflation and wage increases, such as the 1970’s. Bridgewater believes this skews the true nature of future levels of UK house prices which it argues are unlikely to grow much, if at all, in the next few years and then only at 4% per annum thereafter.

A scan of recent forecasts for UK house prices from leading property agents including Jones Lang LaSalle, Knight Frank, Cluttons, Chesterton Humberts, King Sturge and Hometrack plus those from the Office for Budget Responsibility and the Department for Communities & Local Government, indicate a far more sedate level of house price rises is likely and some economists argue that, under a worst case scenario of double dip recession and zero inflation, house prices are likely to fall continuously until the middle of 2014, it says.

Overall, and across the UK, there is a general anticipation of house price falls in 2011 of around 2.5% with modest levels of growth for the following four years; 2012 is expect to report increases of just 2.5% followed by 4.8% in 2013 and 5% in both 2014 and 2015.

Bridgewater is keen to stress this is some way short of the average house price growth of 8 or 9% often cited by advisers in their dealings with clients. The only place where these figures hold true is the prime, multi million pound London market where prices are buoyed by foreign investors.
 
Bridgewater argues that clients with lifetime mortgages over the last two to three years, and during the next five, are likely to see their debts rise considerably at the same time as the value of their house achieves modest growth at best. This would give little chance of future releases of equity in the future.

‘I am consistently told by many equity release advisers that house price rises of 8 or 9% are the norm for the UK and therefore lifetime mortgages are generally the most suitable product for their equity release clients as the level of rolled-up interest debt will be less than the increase in house price,’ said Peter Welch, head of sales and distribution at Bridgewater Equity Release.

‘This bullish assumption tends to be based on an analysis of the last 40 years which takes in the massive wage and retail price inflation rises seen in the 1970s. This period completely distorts the house price picture and to suggest that prices are going to continue to rise by anything like the levels we saw immediately pre-credit crunch to us seems ludicrous,’ he explained.

‘The real likelihood is that we will see flat house prices at best in the next few years because of the economic cycle, particularly wage level restraint and low growth, and the state of our banks. We are unlikely to return to the double digit levels of house price growth the market has witnessed ever again and instead, it is much more likely, that in the long term wages will rise in line with productivity (2%) and inflation (2%) and we will have growth of perhaps 4%.

‘These false assumptions of house price growth by advisers could spell real difficulty for those clients who are recommended and sold lifetime mortgage products. Just over the last few years, given falling house price levels, there will be many customers with lifetime mortgages who will be unable to access any further equity in their properties because their debt levels will have risen, house value will have fallen, resulting in an increase in their mortgage LTV. This could be a real problem for many customers and it is an issue which would not have arisen with a home reversion plan which delivers far greater value in a level and falling house price environment given that it shifts the risk of such changes in house price on to the provider and does not keep them with the customer,’ he added.

Welch believes that advisers who are overly bullish on house price growth should revisit their own analysis of the situation. ‘They should make sure they provide a transparent and unbiased view to clients on where the price of their house is likely to move in the short, medium and long term,’ he concluded.