‘We’ve been wrongly taught that our property can be our pension’

House prices are plummeting faster than even the most downbeat forecasters were predicting just a few months ago. The latest report from the Halifax shows a decline of 7 per cent since the start of the year.

And there may be much worse to come, says Simon Ward, an economist at fund management group New Star. “Without an economic downturn we could be looking at a further drop of between 5 and 10 per cent in the coming 18 months. But if there is a recession, property prices could fall a further 20 per cent over the next two or three years.”

That would be bad news not only for people looking to sell up but also for those who have been relying on the rising value of their home to provide a nest egg in retirement through the use of equity release. These schemes allow homeowners to draw down between 20 and 50 per cent of the value of their property as a lump sum or monthly income. In essence, they are lent this sum of money until they either die or go into sheltered accommodation. At that stage the house is sold and the loan, with interest, is repaid.

If prices keep rising, the homeowner’s debts will remain a small part of the value of the property. But in a market downturn, the loan will account for a larger and larger proportion of that value.

“[Even] if house prices remained stable, the effect of rolling up interest, doubling your debt every 10 years, could have a huge impact on your financial situation,” says Jane Vass, policy officer at charity Age Concern. “With the eroding effect of compound interest and the downturn in the housing market, those who have taken equity release early in life could find they are left with nothing.”

The industry counters that it does have safeguards in place. Nearly all equity release providers are signed up to a code under which the customer can never owe the scheme more than the house is worth.

Andrea Rozario, the director-general of the industry body Safe Home Income Plans (Ship), says that because of this guarantee and the nature of the market, consumers have little to fear from the current round of falling house prices. “Those looking to equity release should take comfort in the longer-term trend in property values, which is always up. Equity release has a role to play in many people’s financial planning, regardless of whether prices do fall for a period.”

But some retired people do not have the time to wait for that upturn in the property market. And for everyone else, the speed with which these schemes can build up debt has led many financial advisers to warn against relying on bricks and mortar to provide an income in retirement.

“For the past decade, people have been wrongly taught that property can be their pension,” says Ashley Clark of independent financial adviser (IFA) Needan-Adviser.com. “Suddenly the market has turned and they are realising that this is not the case and that putting all your eggs in one basket can be very dangerous.

“It is crucial that people spread their investments to protect them from the effects of these changes,” he adds. “They should create a diversified investment portfolio for their retirement, including a core pension fund, which offers tax relief on contributions and protection from taxes like capital gains.”