Don’t Forget the Fourth Pillar

By Christine Brownfield
With the 2018-19 Federal Budget announcement of an expansion of the little-known Pension Loans Scheme, it is timely to revisit the hurdles to be overcome before housing can play a meaningful role in meeting Australia’s future retirement income challenge.

The family home as an asset class
Housing wealth is increasingly being recognised as the fourth pillar of our retirement incomes system (alongside the age pension, compulsory superannuation and voluntary savings), despite being relatively untapped. For current and soon-to-be retirees, rates of home ownership are high and their home is often their largest asset.

Residential property is the largest asset class in Australia, with an estimated value of over $7 trillion. This compares to ASX listed equities at $1.9 trillion or, for a different comparison, and perhaps one more relevant to retirement funding, aggregate superannuation assets of around $2.6 trillion.

How can housing wealth be released?
The family home is not just a place to live but also a store of wealth. The wealth can be released by simply selling the home, but this creates the problem of where to live, and there are clear benefits to home ownership in retirement.

Downsizing is another way to release housing wealth and was the focus of an initiative announced in the 2017-18 budget. Downsizing can work well financially and emotionally for retirees in large/ valuable homes, who are happy to move to a different area where housing is cheaper, or who can find suitable housing stock to downsize to in their local area. Other retirees might investigate downsizing but find that it isn’t a good way forward for them for reasons including lifestyle, community, costs such as stamp duty and sales/marketing/relocation expenses and public policy settings. Many are simply not interested in downsizing – they wish to see out their retirement in their home. Downsizing is often triggered by non-financial factors.

There are also products which facilitate the separation of the ‘place to live’ and ‘store of wealth’ attributes of the family home. Debt home equity release products are known in Australia as “reverse mortgages” or there are mechanisms which facilitate a senior homeowner selling a share of the future sale proceeds of the home whilst continuing to live in it.

How do retirees use housing wealth?
Increasingly, senior Australians release housing wealth to extinguish housing debt remaining at retirement. For some, the alternative would be having to sell the home. Housing wealth might also be used to buy a new car or white goods, to finance home modifications, to pay medical expenses or to fund in-home care. Wealth might be accessed to help family members enter the housing market. Some seniors seek to access funds to enjoy travel that would otherwise be unaffordable or simply to live a more comfortable retirement.

Hurdles to overcome
Given the size of the “fourth pillar” and the number of “asset rich, cash poor” senior Australians with few assets other than the family home, it is interesting to consider why the release of housing wealth during retirement is not more prevalent. The possible explanations are wide-ranging.

Public policy settings encourage retirees to store wealth in the family home as it is an asset which is free from capital gains tax and exempt from age pension means testing. This creates a financial incentive not to release housing wealth.

There is no overarching federal legislation applying to providers of home equity release products. Reverse mortgages are heavily regulated but not home equity release arrangements in general. Sensible principles-based legislation could provide comfort to retirees that products/schemes are regulated and must provide, for example, security of tenure. It would also be advantageous to potential providers to have a clear regulatory framework.

Supply of home equity release products is not growing: there are only a handful of products available in Australia, and those on offer have strict eligibility criteria. SEQUAL, the association established in 2004 for providers of home equity release products, closed its operations in January 2017. Two home equity release product providers withdrew from the market in 2017 – Macquarie Bank and Westpac-owned St George Bank both ceased offering their reverse mortgage products.

A significant hurdle to increasing the market for home equity release products is a lack of capital. The flip side of security of tenure for a senior homeowner is that the capital provider will not have their capital returned until the homeowner, or their estate, sells the home. A long-term investment with a lack of liquidity is not attractive. For equity products, the provider of capital would effectively be invested in a diversified pool of interests in residential property. This is a new asset class with no secondary market, which is somewhat at odds with the fact that it would be a subset of a $7+ trillion asset class.

Finally, releasing home equity to fund retirement is not currently “mainstream” in Australia. Aside from the issues already outlined, financial advice may not consider the family home: total asset planning is needed. Many people, understandably, have an emotional attachment to their home, and this makes it difficult to view the home as a financial asset. Downsizing or utilising a home equity release product may be rational courses of action but they are often needed at a time of life when people feel vulnerable and apprehensive about making difficult decisions.

Budget 2018-19: expansion of the Pension Loans Scheme
The Pension Loans Scheme is a reverse mortgage scheme offered by the government. It allows some senior Australians to borrow against their home to top-up their part pension or, if not eligible for the pension due to only one of the assets and income tests, to provide an income stream up to an amount equal to the full pension. The take-up rate has been low historically, attributable to the restrictive eligibility criteria and low awareness of the scheme.

Eligibility for the Pension Loans Scheme is to be expanded from 1 July 2019 to include all Australians of Age Pension Age who own homes. The maximum allowable combined Age Pension and Pension Loans Scheme income stream will be 150 per cent of the Age Pension rate.

Concluding Remarks
In terms of recognising housing wealth as the fourth pillar of our retirement incomes system, this expansion of the Pension Loans Scheme is significant. It is a partial solution to the problem of a lack of capital as the government is effectively stepping in as a loan provider, facilitating an income stream with the borrowing secured against the property. The Pension Loans Scheme will be available to all home-owning senior Australians including those who do not meet the eligibility criteria for home equity release solutions currently on offer. Most importantly, awareness of this scheme will increase and it is a step towards the use of housing wealth to supplement retirement funding becoming “mainstream.”

Christine Brownfield is Company Actuary at Homesafe Solutions Pty Ltd

2 thoughts on “Don’t Forget the Fourth Pillar

  1. Since the early 1990s the number of researchers including myself have argued for home-equity conversion programs. It is welcome to see that government now intends to implement the version of HEC after having it recommended by treasury officials for a number of years. HEC programs will not have a major impact list of all for the asset poor but they present some useful benefits with very few larger costs.

  2. BBQ discussions reveal that parents want to ‘leave something’ for their kids – and that something is the family home because they normally have precious little else to give. So no matter what their financial situation is outside of their home asset, the parents will hang on to the house to the bitter end – ‘for the kids’. The solution is clear – tax the family home like everything else and stop disadvantaging the growing number of Australians who will never own a home.

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