Julian Knight: Home truth is your house may not be much of a pension
People may be disappointed if they bank on the equity value of property to finance retirement
Saturday 03 August 2013
My home is my pension. If only I could have a pound for every time someone has said that to me I'd probably have enough cash to afford both a home and a pension.
You can see why people say it. They have been imbued with the spectacle of rising house prices from the 1970s onwards which has actually been one of the greatest wealth bringers to the British working class – or what's left of it – in our history.
We all know the stories – you may be a beneficiary or your parents might – of people buying their homes for a few thousand pounds, bringing up their families and now sitting on property worth many hundreds of thousands.
Many of this golden cohort of people quite justifiably can consider their home a pension, or at least their cash deposit box, able to support themselves, their lifestyles and in turn help their children onto the ladder.
However, this is a dwindling group and although property has still generated returns for those who bought in the 1990s and 2000s these aren't anywhere near as great proportionately as those people who bought in the 1970s.
What's more, property values are vastly different across the UK. The 2000s saw a closing of the price differentials between London and the South-east and the rest of the UK, but since the financial crisis this gap has widened again and much more than may seem the case at first glance.
The UK property market in many parts of the country has been propped up by action to stave off mass repossessions and tight mortgage lending.
This has meant that prices have remained nominally high but only because there were next to no transactions.
Only now with the advent of the Government's Help to Buy scheme and the Bank of England's funding for lending are we seeing transactions – outside the South-east – start to tick up and some semblance of – for want of a better word – normality return to the housing market.
Regardless, though, I'd say that the lesson for most people in the UK from the property market today – unless we are talking buy to let – is that as an asset, I'm afraid I can't see how a recently acquired home can really promise to yield you enough cash for it to act as your pension.
It may in certain circumstances actually be a millstone; especially if you have taken out an interest-only mortgage with no repayment vehicle in place or over borrowed.
As for those who will reach retirement with a pretty penny tied up in bricks and mortar the difficulty is getting the cash out.
Downsizing can be emotionally difficult. You may not sell in a timely manner and it can cost a fortune to buy a new place in stamp duty and other costs. And MGM Advantage, Retirement income firm, calculated this week that downsizing would only boost people's incomes by a relatively small amount – due to the fact that interest rates and annuity rates are so low.
As for equity release, this has become a better option of late. The industry, which use to resemble the wild west, has got its act together and products in the main are transparent and flexible in a way that wasn't the case a decade or so ago.
However, there is a big problem with equity release as a means by which to get money out of a property. This is because there are nowhere near enough providers with sufficient cash to tie up for what could be many decades to fulfil future demand.
Believe it or not I can see a scenario where homeowners are literally queuing up or putting the names on a waiting list to get equity release with potentially little hope. I know that may seem like an exaggeration, but the industry's own estimates suggest that they only have capacity for a tiny fraction of the total demand for their product in the future.
The upshot of all this is that if you are one of those people who thinks my property is my pension then you should think again, because in many cases it will disappoint.
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