Last week’s (4 October 2022) Daily Telegraph had a nice article by Charlotte Gifford on the impact of higher loan rates and a possible house price fall on the equity release sector:
Equity release market in trouble as rates rise and house prices wobble
‘It will all come crashing down’, warns economics professor
It’s worth a read.
In essence, higher rates and a possible house price fall are not good news for the sector. Says the econ professor “if the Bank Rate hits 6pc and house prices fall by 15pc, then the loss to the lender is … 28 percent of the loan. If house prices fall even more, by 40pc, then the loss would be … 41percent of the overall loan.”
But then again, the ER people are still pretty upbeat, so perhaps it will all go away.
We noticed a couple of flies in the ointment, however.
First, ERC’s CEO Jim Boyd’s comment, quoted in the article, that providers “already have robust plans to adjust to once-in-200-year scenarios, such as house prices dropping significantly and never recovering,” is news to us.
How can that be, we ask, when ER providers are using an ERM valuation model that is not fit for purpose and greatly overvalues ERMs.
We are also a little sceptical because our own stress tests based on a scientifically respectable valuation approach suggest that less implausible scenarios would wipe out much of providers’ anticipated future revenue.
Second, a large rise in long-term interest rates greatly increases the chance of house prices falling, or merely stagnating, in which case the sector will lose heavily even under their own inadequate valuation models.
And lastly, loan rates rising sharply – to 8% or even 9% – greatly increases the chance of the NNEG biting. With a loan rate of 9%, the loan will double in value every 8 years, and quadruple every 16 years, so with a mere 25% loan to value the property will cause the NNEG to bite in 16 years with house prices remaining the same. Thus a sharp rise in loan rates greatly increases the cost to the provider of the NNEG.
Sorry, Jim, but that doesn’t fix it.