Unlocking wealth in the family home

Australian baby boomers are considered one of the most asset rich cohorts in history, but many are income poor. John McLenaghan reports on a push for greater access to home equity, to help fund retiree lifestyles.

Most Australians see their house as a home and not necessarily as a store of wealth. That may change as policymakers, keen to ease fiscal pressures of an ageing population, seek to identify constraints to unlocking this relatively untapped asset.

The Productivity Commission is due to report on 1 December 2015 on policies that affect the Housing Decisions of Older Australians . The Actuaries Institute established a Housing Working Group (HWG) under the leadership of actuary Catherine Nance, a partner at PricewaterhouseCoopers, to work on a parallel path to develop policy recommendations to streamline retirees’ access to their housing wealth. Cathy and working group member Alun Stevens addressed an Insights Session (19 November 2015) to outline the proposals that have been developed and to seek member feedback.

Cathy talked about the current level of retiree housing wealth – approximately $1 trillion – and contrasted that with the cost of meeting retirement needs; accommodation, aged care and health costs. These costs will escalate as longevity increases.

Review the Insights Session Audio and Cathy’s  Presentation .

Whilst acknowledging that eventually housing wealth may need to be accessed to meet rising living costs, the HWG decided to take a neutral position – not to encourage or dissuade retirees from accessing their home equity. Instead, the HWG has concentrated on generating reforms that would provide a better standard of living in retirement by removing biases and/or impediments for accessing housing wealth, if and when required.

The HWG based its proposals on the Institute’s retirement income principles;

• Sustainability to ensure reliable, secure, adequate resources in retirement to meet all needs
• Flexibility which facilitates choice and transaction fluidity
• Equity
  • Intergeneration equity re tax concessions and Age pension
  • Horizontal equity taking into account all asset classes
• Efficiency re. public expenditure
• Simplicity which minimises the need for and cost of advice
• Supportive regulatory frameworks to underpin competition and consumer protection

Cathy put forward specific reform recommendations including:

• The provision of (partial) protection under Age Pension means test for amounts released from home equity so that housing decisions are not distorted (for 70% on Age Pension)
• Government to develop principles-based regulation for home equity release schemes which ensures: security of tenure; applies to all types of products and providers; and facilitates standard and simpler disclosures
• All regulation of home equity release products to be at the Commonwealth level
• Consideration be given to the advice required by borrowers and the licensing requirements for third party distributors and/or advisors
• Regulatory protective measures need to be established to guard against the risk of financial abuse of older Australians who could gain access to significant assets during a period of diminishing cognitive capacity.

The majority view was that the proposition to cap the exemption from the means test should not be a policy proposal as it would attract undue focus and detract from the statement’s primary purpose of improving equity. It was agreed that the proposal should be relegated to simply provide options that government can consider, to improve fairness in the system at some future time. These options include:

• Stamp duty relief as part of wider tax reform package
• Reconsideration of bank lending practices to reduce transaction friction especially around bridging finance for downsizing
• A review of Age Pension arrangements to improve fairness between homeowners with disparate housing wealth including a cap on the value of the home exempted from the Age Pension means test. This should not impact more than 10% of homeowners.

The HWG believes there is a role for Government in smoothing the pathway to unlocking housing wealth but rests somewhere on the spectrum that starts with: raising awareness through improved financial literacy; underwriting the negative equity risk, supporting securitisation programs for product providers; expanding the Personal Loans Scheme and finally establishing a universally government-run reverse mortgage scheme.