The chart above shows the growth of the equity release market since 2000, based on figures published by the Equity Release Council on their website. Blue line shows the number of new customers (including returning customers) each year. The red line shows new lending for the same year.
A few things to note. First, the change in business broadly reflects changes in UK house prices. The 2008 peak is clearly visible, together with the decline up to 2012 and subsequent recovery from 2012 to date.
Second, the final new lending amount is well above the previous peak in 2008. There could be a number of factors here including stronger marketing on daytime TV, societal ‘approval’ of the product by the Daily Telegraph, or simply increased demand for the product as boomers reach retirement age and realise they can’t afford a new washing machine but have a house worth £500k or more.
This suggests future lending patterns based on HPI that I hope the Bank has included in its stress testing and scenario modelling.
Suppose the housing market keeps powering on, as everyone seems to think. Then, if the causality implied by the chart is realised, the lending will increase, and the average strike level of the ERM embedded put rises further. But as we know, ERMs are not like ordinary mortgages where interest is paid. The interest keeps rolling up at ever higher levels. If you believe in autocorrelation and the mean reversion that it implies, this could be disastrous.
Then suppose we have a Japan or Ireland type protracted decline. The chart implies that lending will decline, and ERM lenders will be faced with a run-off situation where they can’t make profits from new business, and are effectively in run-off mode.
Neither scenario looks attractive.