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How a house price crash will crush retirement dreams for millions

wrecking ball and money
wrecking ball and money

A house price crash risks “crushing” homeowners’ long-term finances, as those banking on property wealth in retirement will see their later life resilience fall seven times further than those who rent, new analysis shows.

The bigger the fall in house prices, the more significant the projected damage to retirement financing, as those who hoped to release equity from their homes to fund later life see their potential returns tumble.

Experts warn that retirees must be prepared to accept that they will not have the funds for the lifestyle that they had hoped for.

Modelling the impact of a house price crash scenario, where prices fall by 18pc, investment firm Hargreaves Lansdown found that average later life resilience – the extent to which working-age households are on track for a moderate retirement – among homeowners would drop seven times further than renters in the coming year.

Although homeowners have a stronger later life resilience score than renters, house price falls will strike a much more severe blow to their long-term financial prospects, spelling further gloom for those who have already had to contend with mortgage rates skyrocketing and other rising living costs.

Sarah Coles, of Hargreaves Lansdown, said: “House prices are heading for a fall in 2023, which risks crushing our finances. People with mortgages will still be reeling from the short-term blow of higher interest rates when they’re hit with the horrible news about the damage to their long-term financial resilience.”

Gary Smith, of Evelyn Partners, told The Telegraph: “For a lot of people, part of their retirement strategy is to downsize or enter into equity release to supplement the state pension and any other pension they’ve built up, so this will definitely impact upon their retirement plans, and the lifestyle that they hope to have might not necessarily be what they've planned for as a result of falling house prices.”

One in seven of those over the age of 50 will be forced to sell up or release equity from their homes as a result of the cost of living crisis, according to the LiveMore Barometer, an indicator of the financial priorities of older people.

For the 15 pc of those surveyed by LiveMore, a lender for the over-50s, saying that raising more cash to live on by downsizing or releasing equity was their top financial priority, precipitous falls in house prices would lead to ever-diminishing returns.

Capital Economics has forecast a house price fall of 12pc this year, with Halifax proposing a more conservative estimate of 8pc.

The recent findings 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 later life planning is 49.1 out of 100 - but a house price crash would see a drop of 1.4 points among homeowners, compared with 0.2 points for renters.

The average fall in the score of Gen Z and Millennial homeowners was almost three times steeper than that of their Baby Boomer counterparts - down 2.2 points compared to 0.8.

Mr Smith said that many may consider opting out of workplace pension schemes in order to increase their income quickly to meet urgent living costs, with their later life financing taking a further hit.

He said: “For those on the pre-retirement route, so those who are accumulating wealth, their ability to save through rising mortgage costs and the cost of living means that it puts pressure on their ability to save towards their pensions and how much they can put away. You might find that some people opt out of workplace pension schemes to effectively increase their income to cover the rising cost of mortgage costs and cost of living.

“Lower earners and middle earners might actually see their pension in retirement savings reduced, whilst they redirect finances to meet other more immediate costs, which obviously has an impact in retirement because you have less saved towards your retirement.”

Mr Smith urged workers to avoid opting out of pension schemes “where possible”, but acknowledged that many would therefore have to consider delaying retirement by two or three years.

Ms Coles added: “The Barometer shows that if house prices were to fall 18pc, later life resilience would drop seven times more for homeowners than for renters in the coming year. This owes much to the fact that in order to get a rounded picture of people’s retirement income and outgoings, the Barometer looks at home ownership - and how much equity people have in their home, alongside pension savings and other assets.

“The idea is that the less equity you have when you get to retirement, the more you’ll need to pay to keep a roof over your head.”

She said: “Times are increasingly tight for homeowners, who face falling savings, rising debt, and an increasingly uncertain long-term future. If your mortgage is set to rise, it’s essential to take stock and work on cutting your costs, to help protect your savings and stave off debt.

”If you’re tempted to change your mortgage arrangements to bring prices down – by switching to an interest only mortgage for a period, or extending the term, you need to consider all your options, and the impact it will have on when you can afford to retire.”

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