A fall in real estate prices risks ‘crushing’ landlords’ long-term finances, as those who bank on home equity in retirement will see their resilience in later life plummet seven times more than those who rent, according to a new analysis.
The greater the fall in house prices, the greater the predicted damage to funding retirement, as those who hoped to free up equity in their homes to fund their future lives see their potential returns plummet.
Experts warn that retirees must be prepared to accept that they will not have the funds necessary for the lifestyle they had hoped for.
Modeling of impact of a real estate price crash scenariowhere prices fall 18%, investment firm Hargreaves Lansdown found that average end-of-life resilience – the extent to which working-age households are on track for moderate retirement – among homeowners would fall seven times more than renters in the coming year.
Although homeowners have a better resilience score later in life than renters, falling property prices will deal a much more severe blow to their long-term financial prospects, adding to the gloom of those who have already had to deal with soaring mortgage rates and other rising cost of living.
Sarah Coles, from Hargreaves Lansdown, said: “Property prices are heading for a fall in 2023 which risks crushing our finances. People with mortgages will still be reeling from the short-term shock of rising interest rates when they are hit by the horrific news of the damage to their long-term financial resilience.
Gary Smith, of Evelyn Partners, told The Telegraph: “For many people, part of their retirement strategy is to downsize or go into retirement. equity release to supplement the state pension and any other pensions they have accrued, so this will certainly impact their retirement plans, and the lifestyle they hope for may not necessarily be the one they they had planned due to falling real estate prices.”
According to the LiveMore Barometer, an indicator of the financial priorities of older people, one in seven people over the age of 50 will be forced to sell or release equity in their home due to the cost of living crisis.
For the 15% of people surveyed by LiveMore, a lender for the over-50s, who said raising more cash to live on by reducing or freeing up equity was their top financial priority, precipitous falls in house prices would lead to increasingly diminishing returns.
Capital Economics has predicted a fall in property prices of 12% this year, with Halifax offering a more conservative estimate of 8%.
The recent results were found as part of the Hargreaves Lansdown Savings & Resilience Barometer, which measures financial resilience out of a score of 100. The current average resilience score for future planning is 49.1 out of 100 – but a collapse in real estate prices would see a drop of 1.4 points among owners, against 0.2 points among tenants.
The average drop in score for Gen Z and Millennial owners was almost three times that of their baby boomer counterparts – down 2.2 points from 0.8.
Mr Smith said many might consider opting out of company pension plans in order to rapidly increase their income to meet urgent living expenses, with funding for their future life being further affected.