Why house prices may not bounce back as fast as we think

I was feeling fairly complacent about the 10% drop in value that my house has apparently suffered since its value peaked in the summer of 2007. After all, it’s still worth a heck of a lot more than we paid for it, and if you look at what happened in the 90s, values should start picking up again in a couple of years anyway.

Until I realized that the situation has changed in a very important way.

Back in the 90s, final-salary pensions were still the norm. That meant that the middle classes could expect to finance their retirements adequately from their pensions, without having to resort to any other funding.

Now, of course, final-salary pensions are a rarity. This means that middle-aged people who were forced to move jobs in the late 90s and early 2000s have to contemplate selling their homes to finance retirement. It wouldn't be too bad if index-linked pensions were doing OK, but they most certainly aren’t. And, of course, food and energy prices have hit older people right where it hurts.

So instead of older people sitting on all the best property, a lot of it is going to come on the market fairly soon, which will help to drive down prices even further.

Our neighbour is in exactly that position right now, trying to wait out the credit crunch while her For Sale sign casts its ever-lengthening shadow and her asking price looks ever more unrealistic. She, and the estate agents, know that one day she’ll simply have to take the best offer available, probably setting a new low benchmark in the neighbourhood.

It’s no short-term problem. Downsizing is here to stay. And not just downsizing: many retirees are opting for equity release instead. Whether people release equity by taking out a lifetime mortgage – repayable at death – or actually sell a chunk of their home to the bank, the effect is that, when they die, their descendants will inherit little, if anything. In fact, more and more children of retirees are already having to subsidise their parents in the face of rising inflation.

Inheritance is the factor that’s enabled a lot of people to afford the silly high prices of the last decade. It’s also kept a lot of quality mid-range property off the market, and helped middle-aged people kickstart their buy-to-let empires.

It’s all good news if you’re trying to get on the property ladder, but dismal news if you’re looking forward to a comfy retirement.