This article is from the Australian Property Journal archive
RENTING retirees are suffering at the hands of the current pension system, and a safety net will be needed to support the growing demographic as more of Australia’s population defers home ownership indefinitely.
A new report from ARC Centre of Excellence in Population Ageing Research (CEPAR), Housing in an ageing Australia: Nest and nest egg?, investigating the links between homeownership and population ageing, shows home purchase are broadly consistent with other social and demographic trends.
Over the past 50 years the median age of home purchase has increased by six years, from age 27 to 33, while the median age of getting a first job has increased by two years; finishing education has been delayed by five; having a child has been delayed by seven; and getting married is now taking place eight years later.
In fact, the median age at death is now 12 years later, and the report’s lead author Rafal Chomik, a CEPAR senior research fellow at UNSW Sydney, said this adds scope for people to catch up and purchase a house later in life.
However, with the Australian retirement system built on the premise of homeownership, excessive or indefinite deferral of home purchase can have consequences.
“Homeownership serves multiple purposes and housing outcomes affect financial and personal health and wellbeing over the lifecycle. It acts as a home – the nest – as well as a store of wealth – the nest egg – to guarantee financial security in retirement,” Chomik said.
“Lifetime homeownership rates will decline if some people postpone purchasing a home indefinitely.
He said banks may be reluctant to lend past a certain age given retirement ages are increasing more slowly, and greater shares may retire with debt.
“There is the potential that in the future more older people end up renting, and if so, we need a safety net to support them as the current retirement income system is failing renters.
“In a world where the divide between renters and owners is increasing, funding pension or rent assistance increases for renters could be the imperative needed for action.”
The National Housing and Homelessness Agreement of 2018 was considered to fall short of a comprehensive housing strategy that brings in tax policy to address investment patterns and income support for renters; rental assistance was not kept up with rental prices, instead pegged to consumer price inflation; and unmet demand for public housing for those aged 55 and over is estimated to increase by 78% between 2016 and 2031.
Schemes that subsidise affordable housing supply, such as the National Rental Affordability Scheme that operated between 2008 and 204, have been “various and come with mixed success”.
The age pension currently offers the same maximum benefit for owners as it does for renters. Chomik said the government’s retirement income system review is due to report next year, and is an opportunity to take housing into account more fully with the aim of narrowing the financial gap between renters and owners in the future.
Indefinite postponement of home purchasing can to vulnerabilities at older ages. New estimates, that take account of housing, suggest that older Australian renters have among the highest relative poverty rates in the OECD, the report said, and they also have greater rental affordability stress than other age groups.
In 2016, about 44% of renters aged 65-74 spent more than 30% of their income on rent, the highest rate of all age groups.
Recent analysis suggests that many older mortgagors face considerable investment and repayment risks. Those aged 55 and over had an investment risk that a 10% decline in house prices in 2016 would see their housing equity reduce by 14%, above the 11% reduction from an equivalent decline in 1988. Their mortgage-debt-to-income ratios have tripled from about 70% to 210% between 1988 and 2016, meaning repayments have climbed as a proportion of income, despite lower mortgage rates.
Older people have higher health expenditure risks, and an exhausted capacity to work. In the 10 years to 2016, nearly 8% of older mortgagors said they were unable to pay bills on time, compared to about 3% of outright owners.
The report noted that that the interaction of owner occupied housing with the age pension is “unlike with any other assets”, exempt from the age pension’s assets test, even though the payment is designed to be needs based.
“This means that the system advantages homeowners at the expense of renters, who receive the same level of full age pension (plus an often insubstantial level of rental assistance),” it said.
Renters can hold more of other assets before the pension is withdrawn as a concession, but this only helps 4% of them. About 93% of renters aged 65 and over in 2016 had non-home assets below the renter thresholds, and 89% had assets under the owner thresholds.
“Since the house one owns usually makes up the majority of one’s wealth, renting among those with more wealth is extremely low, at 1% for those aged 65-plus in the top net wealth quintile,” the report said.
“By comparison, 98% of older people in the bottom quintile rent. This can be expected almost by definition, yet this is not what is assumed in the parameters set in the retirement income system. It highlights the empty provision that the age pension asset means test offers to non-homeowners, whereby they can own more non-home assets before losing pension income, but they hardly have any such assets.”
Including the home in the assets test – at least above a certain high threshold – was highlighted as one of two policies that would do most to incentivise people to downsize, along with reforming restamp duty.
“It would reduce the asset-test-induced frictions in housing sales and distortions between housing and other assets, and potentially release bigger but underutilised houses into the private market if adequate alternatives existed,” the report said.
“In general, greater means testing has been shown to be economically efficient. For example, higher tapers on the age pension could pay off in terms of greater work and savings effort by richer households. A small proportion of the primary residence is already included in assets testing for subsidised aged care.
“A shift in policy could be facilitated by the recently expanded pension loan scheme, which would allow pensioners to live in their home and receive the pension while releasing some equity, some of which would be claimed back from their or their partner’s estate.
