Thirty-nine percent of respondents in a recent survey by The Wisdom Council chose “equity in my main residence” when asked to identify the financial holdings that they expected to rely on the most in retirement¹.
I wonder how many of these have actually though this through. Most people see their home as something very personal. A place where their family grew up, their children went to school and somewhere happy memories were made. To look at it purely as a financial asset might be being somewhat naïve. Will they be happy to live somewhere much smaller with no room for their children or grandchildren to stay? And to abandon somewhere they have lived for most of their lives? Maybe. And maybe not – but it needs to be to be thought through.
I wonder if the reason for the popularity of this option on the survey is less about reality and more about feeling that a retirement box has been ticked rather than having a realistic plan that matches aspirations. You could arguably include “lottery win” in the same category?
Property investment v. personal property
I’m not saying that property isn’t a viable investment strategy. Far from it. But successful property investors rarely confuse commercial with personal and typically “gear” property (borrow against it) to fund acquisition of more property, speculating that the value of their asset will go up and the cost of borrowing will not. Trying to use your own home to invest in property is a different matter altogether.
And there are two further problems with relying on downsizing to fund retirement…
The Institute of Fiscal Studies says that house prices in England have risen by 173% over two decades². Despite that, average pay for 25-34 year-olds has grown by just 19% over the same period. So, many young people may not own a home until later in life, if at all – left with no option other than to rent.
In 1996, 93% of those with a deposit who borrowed four and a half times their salary could purchase a home but that fell to 61% in 2016. So, for this generation, relying on property for retirement is an unlikely option.
Post-Brexit Property Slump?
Mark Carney, Governor of the Bank of England, recently warned the cabinet that in the event of a no-deal Brexit, house prices could drop by as much as 35% over 3 years amid general financial chaos.³ Reports suggested that Carney also advised that this could also be accompanied by spiralling mortgage rates, a weak pound and rising inflation. Many view this as more “project fear”, but it does have relevance if you are thinking about assets to fund retirement in the short term and downsizing is part of your strategy.
The net result of all of this could leave many homeowners in negative equity. In addition to this sudden shock to the economy there could be longer term implications. Once again, the prospect of relying on property to fund retirement could well disappear off the radar completely for many.
Downsizing – The Last Resort?
So, relying on downsizing your home to fund retirement may disappear as an option for those left renting or in negative equity. Others may wake up to the fact that property prices go down as well as up especially, possibly having gone through a painful Brexit. Even those who have escaped without economic scars and managed to land mortgage -free in retirement, must surely question the validity of a plan that involves giving up their long-term home?
People who plan early for retirement have many more options available to them. It is never too early to start planning. The closer you get to retirement the more likely you are to be left with less desirable options – like downsizing. Get a plan together early. Match it to what you want to the lifestyle that you want and keep it on track as the years go by. As always, I’ll be happy to show you how.
Thanks for reading. Yours, John.