Home Equity and Ageing Owners

Between Risk and Regulation

Lorna Fox O'Mahony

• Publisher: Hart Publishing
• Year: 2012
• ISBN:
  9781847319029
• Edition: 1
• Topic: Law
• Subtopic: Property Law
• Index: Law

The growing use of housing equity to support a range of activities and needs raises complex issues, particularly for older owners. In an environment in which older owners are pushed towards housing equity transactions to meet income and welfare costs, they are required to make choices from a complex and sometimes bewildering range of options. The transactions which facilitate the use of home equity as a resource to spend in later life - from 'trading down' and 'ordinary' secured and unsecured debt to targeted products including reverse/lifetime mortgages, home reversion plans and sale-and-rentback agreements - raise important legal and regulatory issues. This book provides a contextual analysis of the financial transactions that older people enter into using their housing equity. It traces the protections afforded to older owners through the 'ordinary' law of property and contract, as well as the development of specific regulatory protections focused on targeted products. The book employs the notion of risk to highlight the nature and causes of the 'situational' vulnerabilities to which older people are now subject as 'consumers' of housing equity, showing that the older owner's personal situation is crucial in determining whether and why they may seek to release equity, the options and products available to them, and the impact of harms resulting from adverse transactions. The book critically evaluates the extent to which this context is incorporated in the legal frameworks through which these transactions are governed, as a measure of the 'appropriateness' of existing legal provision, as well as considering the arguments surrounding 'special protection' for older owners in housing equity transactions.

1

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Housing Wealth and the ‘Ageing Society’

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(1) Introduction

Issues relating to older owners, their homes and the transactions they enter into have attracted considerable attention in recent years.¹ A key aspect of the ‘ageing society’ in developed countries concerns the ways in which ageing owners use—and are expected to use—their housing equity to support various activities and needs in later life. There has been an exponential growth in recognition of the potential for housing equity to be used in later life to alleviate poverty rates,² subsidise living expenses,³ cover the costs of housing needs,⁴ or fund healthcare or welfare needs after retirement.⁵ The growth in opportunities for equity release, and changing expectations regarding the use of housing wealth, have also, crucially, been accompanied by an attitude shift amongst UK homeowners, away from the idea that the owned home provides a repository of wealth to pass on through inheritance, and towards the idea that it will provide a resource of capital and income to spend during the life-course ‘either on high days and holidays, or to meet a more sobering array of welfare needs’.⁶ This book sets out to consider whether current legal approaches to regulate and, in some cases, remedy these transactions are appropriate in light of the particular risks and vulnerabilities associated with housing equity transactions for (marginal) older owners. This chapter opens the discussion by setting out the demographic and socio-economic policy contexts of housing equity use by a growing population of ageing homeowners, and highlighting the urgent need for socio-legal analysis of the issues which have emerged concerning the use of home equity by older owners.

Official statistics emphasise the need to ensure that governmental and legal policy-makers are sensitive to the issues affecting Britain’s ageing population. With birth rates falling and increasing numbers of people living into very old age, the proportion of the population of England aged over 65 years of age is set to grow from 15.6 per cent in 2000 to 19.2 per cent by 2021.⁷ Globally, the ‘oldest old’ (those aged 80 years or over) are the fastest-growing population, currently increasing at 3.9 per cent per year.⁸ In Britain, the number of centenarians has been increasing at a more rapid rate than any other population group since the 1950s.⁹ As the ‘baby-boomer generation’ reaches retirement age, policy analysts are increasingly concerned with the implications of this ‘Agequake’ for economic and social policies,¹⁰ and it is likely that scholarly interest in issues affecting, and affected by, older people will continue to grow in the decades to come. As Kutty has noted in the US context, ‘The economic and social wellbeing of the growing elderly population is … an important issue for society in general and for policy-makers in particular.’¹¹

The demographic and socio-economic contexts set out in this chapter are central to the ‘situational’ context of older owners in housing equity transactions. In a policy context which is primed for increasing use of housing equity by older owners,¹² it is important to assess the legal protections, regulations and remedies available to older consumers. The analysis in this book starts from the view that in any assessment of the appropriateness of legal protections and procedures governing home equity transactions—including when and why law protects, or does not protect, older owners in particular types of home equity transaction—the context of financial decision-making by older owners is crucial. The older owner’s personal context or situation is central not only to the decision to release equity, but also to the options and products available to any given owner to enable equity release. This is particularly the case for ‘marginal owners’, owners in lower-value properties, who are also likely to have lower incomes, pensions and savings, and to face multiple demands on their housing wealth, which makes spending housing equity more ‘high-risk’ for them than for the general population. The growth and diversification of the homeownership sector has included the substantial growth of marginal ownership.¹³ Marginal owners are increasingly likely to face multiple and complex demands on their housing equity,¹⁴ which—with home ownership seen as a proxy for active citizenship, and housing equity a store of wealth to meet a range of welfare needs—they are politically constructed, as ‘owners’, as ‘responsible’ for meeting through their own resources.¹⁵

In assessing the nature and extent of legal protections, regulations and remedies for older owners, the focus of this analysis is on those who are most vulnerable or ‘at risk’. In keeping with the importance of affordability in financial transactions, the term ‘older owners’ is interpreted as referring to those who have passed the ‘normal’ age for retirement.¹⁶ Although recognising that the point at which a retirement age is set may be viewed as arbitrary, and imposes a particular perspective which treats ageing as the ‘problem’,¹⁷ the age at which people retire has a significant impact on their income, which in turn drives housing equity transactions. In the UK at present the normal retirement age is usually 65 years of age for men and 60 for women, although some may retire earlier¹⁸ and some later.¹⁹ Retirement age in the UK has traditionally been influenced by the State Pension Age, which was to be revised upwards from 2010, towards a targeted retirement age of 68 for both men and women by 2046.²⁰ However, this plan has been displaced by legal challenges to the default retirement age: the Employment Equality (Age) Regulations 2006, which made it lawful for UK employers to impose a mandatory retirement age of 65²¹ have been challenged in the European Court of Justice,²² leading the Coalition Government to publish proposals which will seek to phase out the default retirement age by October 2011.²³ At the time of writing it is not yet clear what the outcome of this initiative will be, or, if the default retirement age is phased out, what the effects will be on real income levels for older people. While the proposals would remove this age-based discriminatory barrier, the conventional retirement age continues to provide a useful rule of thumb for determining when an owner may be designated as ‘older’ for the purposes of the analysis in this book, based on two linked premises. First, since the proposed changes in legal status would make retirement a matter of choice rather than compulsion, it is not yet clear how dramatic an effect they would have on employment patterns, and particularly on income in old age for marginal as compared to affluent owners, and for the ‘older old’ as compared to the ‘younger old’. Meanwhile, for those who have already retired, for those who will still choose to do so or for those whose transition into older old age makes it impracticable to continue working, the shift from income generation through employment to decreased opportunities for future earnings will continue to feed the need to release housing equity. Furthermore, those who are no longer earning a regular salary are likely to suffer particular harm from disadvantageous financial transactions, when compared, for example, to younger owners who have a greater opportunity to ‘recover’ from a financial setback²⁴—in the terminology of bankruptcy, to have a ‘fresh start’.²⁵

Chapter two places the housing equity transactions of older owners in their political and policy contexts, while chapters three and four explore the range of risks associated with home equity transactions for older owners, locating these risks within the sensitising framework of risk theories and considering the older owner first as a risk subject and then as a legal subject. Chapter five considers the intersection of a range of competing demands on the older owner’s home: as investment to yield capital or income for various activities, from lifestyle wants to welfare needs, property maintenance to payment for long-term care; as housing, both for the older owner and as housing stock; and as inheritance to pass wealth to the next generation. Chapter six builds on these contextual analyses to consider the arguments surrounding the recognition of older (marginal) owners as ‘vulnerable’ in the context of housing equity transactions, and so in need of ‘special protection’. The legal frameworks that regulate housing equity transactions—which range from trading down and ‘ordinary’ secured and unsecured debt to specialised housing equity products—are analysed in chapters seven to ten. In conclusion, the issues raised in the book are reviewed through a lens of risk and responsibility, to evaluate the appropriateness of the current approaches for marginal older owners and to reconsider law’s role in responding to new types of risk related to housing equity use for older owners.

(2) Ageing Owners: the Demographic Context

In 1999, Paul Wallace published the book Agequake: Riding the Demographic Rollercoaster Shaking Business, Finance and our World,²⁶ which highlighted the implications of the unprecedented global population dynamics that have created an ‘ageing society’. Falling birth rates, resulting from control over fertility and the tendency to have smaller families, and rising life spans due to advances in health and medical care,²⁷ have led to population projections showing that

[t]oday in the developed world, 15 percent of the population is elderly. By 2030, according to the latest UN projections, the share will be closing in on 25 percent; by 2050, it will be closing in on 30 percent. And that’s just the average. In Japan and some European countries, the share will be passing 35 percent.²⁸

The UN has described this process of population ageing as ‘unprecedented, a process without parallel in the history of humanity’.²⁹ The global picture shows increases in the proportion of older people (aged 60 and over), with reductions in the proportion of children (aged under 15) as well as a decrease in the population of ‘working age’ (15–59); and the UN has projected that ‘At the world level, the number of older persons is expected to exceed the number of children for the first time in 2047.’³⁰ With trends set to continue for as long as old age mortality remains in decline and fertility remains low,³¹ the older population is expected to continue growing more rapidly than other age groups at least until 2050.³²

While the global picture demonstrates consistent patterns across developed and developing countries, this ‘Agequake’ has significant implications for economic and social policies, the effects of which are already apparent in relatively high-wealth developed countries, where the process of population ageing is much more advanced. While the global elderly population was 11 per cent in 2007, UK statistics for the same year recorded 21.8 per cent of the population aged 60 or over,³³ and 2007 was also the first year in which the UK population over State pensionable age was higher than the population aged under 16.³⁴ Over the last 25 years the number of people aged 65 and over in the UK has increased by 16 per cent, from 8.5 million to 9.8 million.³⁵ Again, reflecting the global pattern, the rate of growth in the UK population aged 65 and over is only set to increase,³⁶ with the ‘oldest old’ (85 and over) currently the fastest growing age group in the UK³⁷ and projected to more than double again by 2032³⁸; while in the same period, the proportion of the population aged between 16 and 64 is expected to fall from 65 per cent to 60 per cent.³⁹

(a) ‘Intergenerational justice’

One way of looking at the issues raised by these demographic changes is from an ‘intergenerational justice’ perspective. The exchange of support—practical, financial and social—within and across generations is central to our concept of social solidarity, whether at the societal or household level. The impact of the ‘Agequake’ on the ‘generational contract’, particularly in relation to housing, care and inheritance,⁴⁰ has raised issues of fairness and justice which were explored by the UK’s Equality and Human Rights Commission in its Just Aging? programme, and which are discussed in chapter two.⁴¹ On the global scale, the UN has described population ageing as ‘profound’ and as ‘having major consequences and implications for all facets of human life’.⁴² The issues raised by ageing are also clearly gendered: since women live longer than men, they constitute the majority of older people, nearly twice as many of the over-80 cohort, and four to five times as many centenarians.⁴³ Furthermore, with evidence to indicate that certain factors, for example living alone, are associated with older people being less financially capable and more vulnerable to financial abuse, and to unfair or exploitative contracts,⁴⁴ and longer life-expectancy and lower propensities to remarry meaning that older women are almost 250 per cent more likely to live alone compared to older men,⁴⁵ vulnerability and risk in housing equity transactions is also clearly gendered. With global ageing patterns poised to challenge the structural sustainability of the economy, particularly retirement systems, of family arrangements and even threatening to ‘rearrange the world order’,⁴⁶ this book argues that it ...

Table of contents

• Cover
• Title
• Copyright
• Preface
• Summary Contents
• Table of Contents
• Table of Cases
• Table of Legislation
• 1 Housing Wealth and the ‘Ageing Society’
• 2 Political and Policy Contexts
• 3 The Consumption of Housing Equity in a Risk Society
• 4 The Older Owner as a Legal Subject in Private Law
• 5 The Meanings of Home for Older Owners
• 6 Vulnerabilities and Older Owners
• 7 Older People and ‘Ordinary Debt’
• 8 Fairness in Contract and Consumer Credit Regulations
• 9 Targeted Housing Equity Products and FSA Regulation
• 10 Equitable Remedies and Older Owners
• Conclusion
• Index