Crashing home ownership, mortgage debt to smash retirement system

By Leith van Onselen

Academic researchers, Rachel Ong and Gavin Wood, warns that the number of mature age Australians carrying mortgage debt into retirement is soaring, endangering Australia’s retirement system. From The Conversation:

Microdata from the Bureau of Statistics survey of income and housing shows an increase in the proportion of homeowners owing money on mortgages across every home-owning age group between 1990 and 2015. The sharpest increase is among homeowners approaching retirement…

For home owners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14% to 47%…

Meanwhile, the average mortgage debt-to-income ratio among those with mortgages has pretty much doubled across every home-owning age group.

In the 45-54 age group the mortgage debt-to-income ratio has blown out from 82% to 169%.

For those aged 55-64 it has blown out from 72% to 132%…

Growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to boost the age pension

This will put pressure on the government to boost spending on housing assistance, which is likely to further boost demand for housing assistance.

This is only half the story. Crashing home ownership rates will also place acute pressure on Australia’s retirement system and could send government spending on housing assistance soaring. From The Grattan Institute:

…new Grattan Institute modelling shows the share of over 65s who own their home will fall from 76% today to 57% by 2056 – and it’s likely that less than half of low-income retirees will own their homes in future, down from more than 70% today…

Home ownership is likely to fall further in coming years. Using Grattan Institute modelling, we find that on current trends, the share of over 65s who own their home will fall from 76% today to 74% in 2026, to 70% by 2036, 64% by 2046, and 57% by 2056… it is more than likely that less than half of low income retirees will own their homes in future, down from more than 70% today…

Today’s younger Australians will become tomorrow’s retirees.

Worsening housing affordability means renting will become more widespread among retirees. As a result, more retirees will be at risk of poverty and financial stress, particularly if rent assistance does not keep pace with future increases in rents paid by low-income renters.

That’s why our Money in Retirement report recommended boosting Commonwealth Rent Assistance by 40%, at a cost of $300 million a year in today’s dollars. That would restore it to the buying power it had 15 years ago. It should be indexed in future to changes in the rents typically paid by the people who get it, so its value is maintained, as recommended by the Henry Tax Review

The 2016 Census highlighted in all its hideous glory the collapse in home ownership, especially among younger Australians:

As well as the collapse in the proportion of households that own their homes outright, from 41% in 1996 to 31% as at the 2016 Census:

As expected, the decline in home ownership has been met with an increase in households in rental accommodation, which has increased from 27% in 1999 to 31% as at the 2016 Census:

The growth in rented accommodation has also been broad-based, with all jurisdiction experiencing large increases since 2001:

In a similar vein, the percentage of households in group accommodation – defined as one that consists of two or more unrelated people, where all residents are 15 or over – has increased across all jurisdictions and nationally since 2001:

Australia’s current retirement system is based on the assumption that most people will own their homes. But that assumption is running face first into the falling rates of home ownership.

In addition to lowering the system-wide cost of housing through a combination of reforms, the Aged Pension system needs to be transformed to make it more neutral between owning a home and renting.

The solution I have espoused many times is to:

  1. Include one’s principal place of residence in the assets test for the Aged Pension at some point in the future (e.g. 1 July 2020), thus allowing current retirees and prospective retirees adequate time to make arrangements.
  2. Raise the overall pension asset test threshold as well as the base rate.
  3. Extend the existing state sponsored reverse mortgage scheme, the Pension Loans Scheme, to all people of retirement age so that asset (house) rich retirees can continue to receive a regular income stream in exchange for a HECS-style liability that is recoverable from the person’s estate upon death, or upon sale of the person’s home (whichever comes first).

Under such a plan, asset rich pensioners choosing to remain in place could continue to receive an income stream as they do now under the Aged Pension, but with less drain on the Budget and on younger taxpayers. But they would similarly be incentivised to move as the family home would no longer be viewed as a tax free shelter. Renting pensioners would also be made significantly better-off via the combination of a higher asset test threshold and a higher pension base rate.

The May 2018 Budget addressed the third point by extending the Pension Loans Scheme, but it did not touch the other two areas, which is vital if the system is to be made more neutral towards home owner retirees and renting retirees.

There’s a wide range of groups that believe one’s principal place of residence should be included in the assets test for the Aged Pension, including the Productivity Commission, The Grattan Institute, The ACCI, The CIS, and the Australian Centre for Financial Studies’ Professor Kevin Davis.

One wonders how long this issue can continue to be ignored given the collapse in home ownership and the rise in renters.

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