Almost 3m homeowners relying on equity in their property to fund retirement have been warned it could take as long as a decade for house prices to return to the heady levels of last year.

The warning has big implications for the “baby boomer” generation seeking to cash in on the wealth in their property by downsizing after their children have flown the nest.

Savills, the estate agency, estimates that as much as £12 billion of property will be released into the market this year as people downsize, adding further pressure on prices.

City traders are betting that house prices will fall 10% this year and by a total of 23% before they trough in 2011.

The market will then start to recover, but will not regain current levels until 2017, according to Tradition Property, a broker which runs a futures market that allows investors to bet on the Halifax house price index.

Futures markets have a tendency to be overly gloomy, but they are not out of line with the downturn of the 1990s. Then, prices fell by 20% from their peak in autumn of 1989 to their trough in the spring of 1993, but took until spring 1998 to get back to their previous highs, according to Nationwide building society.

Ed Stansfield, economist at consultancy Capital Economics, said: “If you look at previous episodes of house-price falls, you could reasonably expect prices to adjust downwards over the next three to four years. It could take a further six to seven years for prices to recover to current levels.

“There has been a profound shift in the way people regard property. Mortgage lenders are unlikely to offer the kinds of deals they did in the past for many years to come. With rising inflation and possible increases in unemployment, people are going to be less able to afford the property they want for a long time.”

House-price falls are not a problem for homebuyers trading up because the property they are purchasing also drops in price, by more than the home they are selling in cash terms. For people trading down, however, price falls could leave a big dent in the amount of money they were hoping to live off in retirement.

A homeowner who wanted to release £200,000 by downsizing to provide a retirement income would get £2,756 less a year if house prices fell by 20%, as some predict, according to Saga Personal Finance.

Rachel Vahey of pension company Scottish Equitable said: “People have been in love with property as their pension for the past 15 years or so believing it to be the answer. This is no longer the case as the market starts to turn.”

The gloom has prompted some experts to urge expediency. Alex Edmans from Saga, the over-fifties specialist, said: “If you need to release equity from your home in the near future, it might be advisable to do so sooner rather than later while property prices are still high to enable you to release a higher level of capital.”

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