RAMs charge $70b home equity market

By Nick Stride

Thursday 5th February 2004

A trickle of new home equity-release products is predicted to become a flood as financial services companies eye the retiring baby boom generation.

In recent weeks two companies, Sentinel Ltd and Avon Investments, have announced new products aimed at people wanting to turn equity in their homes into an income stream.

They join Dorchester Pacific subsidiary SAI Life, which has been struggling to gain acceptance for its reverse annuity mortgage (RAM) product.

The market is as yet tiny. The value of RAM annuities in Dorchester's accounts is only $11.4 million.

The potential, however, is huge.

According to research done by Sentinel there are about 500,000 New Zealanders over the age of 65.

They live in 385,000 houses with an estimated value of $70 billion. Some 90% to 95% of these are mortgage-free.

Research undertaken by the Retirement Commission estimates the over-65 community, now 12% of the total population, will swell to 25% within 35 years as the baby boom generation retires.

Sentinel calculates a "conservative" housing inflation rate of 4% a year, made up of 2% general inflation and 2% real house price increases. Extrapolating from those sets of figures, it estimates the value locked up in retired peoples' homes could reach $700 billion in 35 years.

While RAM and home equity release products have struggled for acceptance here and in Australia, they have huge markets in the UK and the US and financial services companies expect local markets to start catching up.

One reason, according to a recent AMP survey, is that attitudes toward "spending your kids' inheritance" are changing. As Sentinel managing director Richard Coon puts it, "ideal financial planning is when your last cheque bounces."

Booming house prices have left many people better off than they had expected to be, and so in a position to leave more to their heirs than they had expected.

Because so many people retired asset-rich but income-poor, they were likely to be increasingly inclined to unlock some of the value tied up in their houses to boost their incomes.

"Our actuarial assumptions are that the percentage we lend will grow to a loan-to-value ratio of 50%," Mr Coon said.

"We expect only a very small proportion of our customers could get into a negative equity situation."

Low interest rates are also expected to contribute to RAMs' growth. Increasing consumer familiarity and acceptance are predicted as larger financial services groups bring marketing muscle to bear behind new products.

Mr Coon also expects growing interest from government as a thriving market for RAM-type products would help close the gap between what is provided by private savings, tax-funded superannuation, and the "Cullen Fund" and what is required to provide adequate income for the retired baby boom generation.

One way governments could assist the market's growth is through tax treatment.

While mainstream RAM products pay an annual taxable annuity, Sentinel's new offering provides a non-taxable lump sum.

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