This is a follow-up to my post “Equity Release Revisisted” which prompted me to look into the subject again and start a new series of blogs on the subject. I first wrote about this in 2012 and then again in 2015. (You can find my earlier posts by clicking on Equity Release in the TAG CLOUD).
My research about Equity Release continues and today I stumbled upon a Report commissioned by the Adam Smith Institute, that you would be most unlikely to find, unless it was raining and you had nothing better to do.
It is obliquely called “Asleep at the Wheel: The Prudential Regulation Authority and The Equity Release Sector “. Sounds like riveting stuff 😀. Written by Professor Kevin Dowd of Durham University. It is not exactly bedtime reading, unless you want to go to sleep.
But, it has some interesting facts about Equity Release which I’ve repeated below :-
- The UK’s Equity Release market nearly trebled in size between 2012 and 2017 and is forecast to grow a further 40% by 2020.
- Prudential Regulation Authority stress tests in 2017 indicated that a 30% house price fall could lead to losses of between £2 billion and £3 billion.
- Firms are greatly under-valuing their No Negative Equity Guarantees – guarantees that ensure that borrowers’ debt can never exceed the value of the mortgaged property.
- We never seem to learn. Equitable Life hit the rocks two decades ago because it under-valued its long-term guarantees. Now the Equity Release sector is in deep trouble for the same reason. In both cases, the firms involved got into difficulties because they were using voodoo valuation methods that had no scientific validation. Same causes, same results.
The report was published in August and received quite a lot of attention in the financial press. But, it did not appear on the national news, nor is it likely to have been seen by the majority of older people. There has been quite a muted response from the Equity Release providers, who have very much played down the report.
The immediate impact of the report does not affect older people who have taken out Equity Release loans, since they already have their money. The bigger impact could be to the industry as a whole because if this report is correct, they are seriously under-capitalised.
If this report is anywhere near correct, then the Equity Release market could collapse altogether.
Is this the first warning signs of an Equity Release sector in trouble? It’s probably going to take someone with more time and skill than I have to get to the bottom of this.
BUT I’ll keep trying.