Debt forces retirees to sell up homes and rent instead

RETIRED homeowners are shunning owning their own home to join the 25 per cent of retirees who already rent - with debt the main reason for the move.

More than two in five of these retired renters are former homeowners who, for a range of reasons, have made the decision to sell.   

The Prudential study found that the decision to sell their property and move into rented accommodation was mainly driven by finances - around 40 per cent were forced to sell their homes to pay off debts, 19 per cent needed to release funds in order to cover the cost of a divorce or separation, and nearly one in ten sold in order to use the money to boost their retirement income.

But on average it then left them with higher housing costs.

According to the study, retired renters pay an average rent of £423 a month, roughly two-thirds more than the average mortgage repayment paid by retirees who still have home loans, of £257 a month.

Almost one sixth of retired renters choose not to own their home as a lifestyle choice, says the report, while 35 per cent say they rent because they do not have enough money for a deposit to buy a property and 41 per cent cannot afford home ownership. The majority of retired renters (58 per cent) have never owned a home and nearly three quarters of them plan to continue renting for the foreseeable future.

Seven per cent used some money from the sale of their property to help their children get onto the property ladder, while nine per cent used the money to help support their children in other ways. 

Stan Russell, a retirement expert at Prudential, said: "Renting in retirement can make financial sense and accessing property wealth to boost retirement income is a genuine solution for many. Our research shows that many retired renters are perfectly happy with this arrangement.

"However, retirees should be aware of the extra financial burden they could be taking on if they choose to sell up and rent."

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Prime London house prices tipped to rise 26%

Property prices in the capital's most prestigious postcodes are continuing their stratospheric rise.

Knight Frank, the upmarket agency, began this year by saying prices in London's smartest districts would not rise during 2013, largely because stamp duty on the purchase of homes over £2m was increased from 5% to 7%.

But the firm has just revised its forecast from zero to 6%, saying "in spite of record prices viewings are up 15% compared to 2012". Applicants and sales volumes are also up, Knight Frank says, confounding the idea that more stamp duty would deter buyers.

Continued price growth follows already massive gains for this top slice of the market, generally referred to as "Prime Central London" (PCL) and comprising the fashionable areas of Kensington, Knightsbridge, Belgravia, Regents Park and Chelsea. Prices here are 60% higher than in March 2009 when the global financial crisis was at its peak.

Now prices are tipped to rise even further fuelled by foreign buyers.

"PCL prices are expected to increase by a further 26% in sterling terms between 2013 and 2018 but at a much slower rate for international buyers," according to Knight Frank researcher Liam Bailey. He reckons for US dollar-denominated buyers, prices will rise a smaller 15% over the same period as the dollar strengthens against the pound. Since Asian buyers use US dollars for these types of transaction, they would experience a similar benefit.

UK house prices up nearly £2,000 in a month

UK house prices increased by 0.8% in July and were 3.9% higher than July 2012

The typical UK home is now worth £170,825 - up from £168,941 in June

Strongest rate of annual price growth since August 2010

Commenting on the figures, Robert Gardner, Nationwide's Chief Economist, said:

“UK house prices rose by a robust 0.8% in July, providing further evidence of an upturn in the housing market.  The annual rate of house price growth increased to 3.9% in July, though this figure was boosted by the low base for comparison, as prices declined by 2.6% in July 2012.

“House prices are currently around 12% higher than the lows seen in the midst of the financial crisis, though they are still around 10% below the all time highs recorded in late 2007.

“Signs of a modest improvement in wider economic conditions and further modest gains in employment are likely to be lifting buyer sentiment.  An improvement in the availability and a reduction in the cost of credit, partly as a result of policy measures such as the Funding for Lending and Help to Buy schemes, are also boosting the demand for homes.

“At the same time, the supply side of the market remains fairly constrained.  Building activity is still subdued – in Q1 housing completions in England were down 8% compared to the same period of 2012 and around 40% below the average number of quarterly completions in 2007.  The fact that rental growth has been consistently outstripping wage growth reinforces the notion that housing more generally remains in relative short supply.”

Interesting infographic on UK housing market

Source: Savills

Are we witnessing a housing recovery?

Housing market activity has picked up significantly this year with every month bringing a fresh batch of bullish data. Mortgage lending, house prices and transactions are all beginning to show signs of life, even outside the bright lights of London. This raises the question of whether this is the start of a meaningful recovery or a short-lived bounce similar to that seen in 2010?

Most indicators are now at or above the levels seen in 2010 during the early bounce back from the downturn. Average house prices are up 4.1% over the year according to the Nationwide index, while transaction levels are at their highest since October 2008. At 625,000 a year, annual mortgage approvals for house purchases are at their highest since July 2010.

Yet despite all the apparent record breaking, all three of these indicators are substantially below their longer-term pre-crunch averages. Behind the average statistics, the market remains fragmented with parts of the country still experiencing price falls.

Debt and equity

The post-credit crunch housing market has been characterised by low mortgage rates and homebuyers’ struggle to raise a deposit. Mortgages offering high loan-to-value ratios, popular in the noughties boom, are now scarce. Lenders’ demand for bigger deposits coupled with high house prices, means buyers are now required to save at least 70% of their income (120% in London).

Affordability and mortgage constraints have pushed many into the housing market’s overflow tank – the private rented sector. Although the private rented sector has been growing for the last decade, demand for rental homes has accelerated since 2009 and has been most acute in London where the economic recovery has been strongest.

In areas where house prices have fallen significantly, the scarcity of high loan-to-value mortgages have created a generation of mortgage prisoners who would be unable to buy or remortgage their existing home in the new lending environment.

But not everyone in the market has suffered. The substantial drop in base rates and hence mortgage repayments has allowed many existing homeowners to ride out the recession in relative comfort. Some have even taken advantage of low rates to pay off their debt. This has created a bigger split between equity rich homeowners, usually older generations, and those struggling to get a foot on the housing ladder.

Government intervention

The plight of first-time buyers has prompted the Government to launch a number of schemes over the years aimed at improving activity in the housing market. Most have focussed on the new build sector and have had a limited impact overall.

The latest scheme, Help to Buy, goes further than any of its predecessors and is aimed at all buyers, not just first timers.

But the main driver of the current improvement in activity this year has been the Bank of England’s Funding for Lending Scheme (FLS). The primary purpose of FLS is to provide banks with below market rate funding while they restore their capital positions. The side effect of increased lending has fed through to the housing market rather than business lending.

The biggest effect of FLS has been to drive down mortgage rates across all product types, including mortgages at higher loan-to-value ratios. While overall, mortgage rates are not as cheap as the market leading deals that are advertised, actual borrowers’ rates are down substantially.

Blowing a bubble?

Inevitably the prospect of rising house prices has led people to question whether we are seeing the beginning of another bubble. But behind the headlines, the increase in market activity has been due to increased turnover of existing debt rather than the creation of new debt.

Overall, the improvement in market activity is a welcome sign as increasing turnover will contribute to economic growth and hopefully rising incomes will allow housing market affordability to rebalance over the medium to long term.

However, looking ahead, although we are unlikely to see any increase before 2015, interest rates rises could dampen the housing market recovery. After four years of official rates at the current unprecedented low of 0.5%, higher borrowing costs will place a heavy burden on homeowners who stretched themselves when rates were low. The affordability squeeze may act as a brake on future house price growth.

Source: Savills

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