Home equity conversion

Home equity conversion

Council on the Ageing (Australia)

Home Equity Conversion:

Getting the policy right and getting the product right

for older Australians

by

Veronica Sheen
Deputy Director, Council on the Ageing (Australia)

Paper presented to

Changing needs, Growing Markets Conference

An industry development forum organised by the

Department of Housing NSW;
Department of Ageing, Disability and Home Care NSW

Sydney

18 February 2002

Council on the Ageing (Australia)
Level 2, 3 Bowen Crescent
Melbourne Victoria 3004
Phone: 03 9820 2655
Facsimile: 03 9820 9886
Email: cota@cota.org.au

Introduction

There are many challenges involved in the provision of an adequate retirement income to all Australians who are either retired or planning to retire in the next 2-3 decades.

The challenges arise from:

increased longevity: people are living longer and healthier lives and need a good income which will last the distance;

rising expectations: people are moving into older ages with greater expectations of access, participation and opportunity in the mainstream culture than previous generations;

an ageing population: the proportion of the population aged 65 and over is increasing from 12 per cent of the population to around 18 per cent by 2030 and to 25 per cent by 2050.

The problems in the provision of an adequate retirement income is a major issue for older people, the broad community and state and federal governments of all political persuasions.

There are two paramount issues.

First, many older people are simply not managing to fulfil a lifestyle they deem to be satisfactory on a low income particularly a full age pension. The adequacy of income for older people is a very controversial issue as is the whole poverty debate. There is no question however that at COTA we have noted a significant increase in the incidence of serious hardship amongst older people in the last 2 to 3 years.

Second, Governments are very reluctant to make major changes to the fundamental structure of the retirement incomes system. At the present time, our analysis is that Australian Governments are locked into the theory of the current "3 pillar" system for the long haul:

a means tested pension set at a "survival rate" provided through general revenue;

a compulsory superannuation system with a great many flaws and loopholes;

private savings.

Of course in the forseeable future many if not most older Australians will have a retirement income that is more and more likely to blend a public pension with a private income source: in effect the three pillars are merging into one. This is already happening to a significant degree.

In the Australian context it is very important to understand the role of owner-occupier housing in terms of the retirement incomes system. Historically, housing has been a major savings vehicle in Australia compared to many other countries where savings are made into contributory pension systems or social insurance schemes which promise a retirement income at a much higher replacement rate of pre-retirement income than is customary amongst older Australians – however, more of this income is likely to be spent on housing rental.

Older Australians have one of the highest rates of owner occupancy in the world at over 75 per cent. The UK, Germany, France, Sweden and Switzerland have owner occupancy rates under 50 per cent. The USA, Canada and New Zealand have rates closer to our own. However, we find that in those countries with lower owner-occupancy rates, retirement incomes are more likely to be considerably higher and public housing a real option for many older people.

As we are well aware the "family" home is a very sensitive issue for older people as they see it as their bulwark against uncertainty and a gift to the generations coming after them. The 1997 "nursing home debacle" represents a salutory lesson to governments in trying to use the family home to inject funding into the aged care system. None of us will readily forget the catastrophe for the Government as it attempted to apply the same arrangements for entry into nursing homes as apply in hostels where entry is conditional on paying a bond – on average around $60,000 in effect requiring the sale of the older person's home.

I believe this understanding of the fundamental nature of the retirement incomes system is very important in setting out the background to the discussion on Home Equity Conversion.

In terms of retirement incomes, at Council on the Ageing we have been struck in the past two years by the linking together of both a dramatic rise in complaints from older people about the problems they have with their income and the rise in demand for home equity conversion products.

There appears to be a number factors coming into play:

the GST is undoubtedly creating pressures, there is an increase in user pays for services that used to be free and some people are caught out by changes such as the removal of some pharmaceuticals from PBS or the demise of bulk billing. Many older people feel compelled to pay for private health insurance because they fear that they will not be able to access the health care that they need within the public system;

people are outliving their provision of savings and at the same time have increased needs and expectations;

there is very poor public assistance for older people to maintain a home: especially in terms of major repairs and renovations;

high capital growth in housing throughout the capital cities especially in older, established areas where many older people live – particularly Sydney, Melbourne but also including other capitals;

changing attitudes about the sanctity of the family home and the need for a legacy to pass on to the kids (attitudes here still need to be tested)

the need or desire to pay for care either in a residential facility or at home;

We have a situation where older people are looking to alternative ways of accessing additional income or capital sources – the home is of course that only alternative source of income or capital beyond trying to stretch the public purse – and as COTA well knows this is the most difficult of enterprises.

The demand for home equity conversion is translating into the development of new products at the present time and a number of these will shortly be launched into the market place.

The proliferation of products will pose a challenge to governments at two levels:

consumer protection; and

defining the role of home equity conversion within a retirement incomes policy as well as the housing and aged care policy framework.

For this paper, I wish to briefly flesh out some of the long term challenges for governments in terms of public policy around home equity conversion.

Getting the policy right

If current demand is any indication, an ever increasing number of older people will wish to use home equity conversion products in the future.

The major temptation for governments will be to embody an expectation of use of home equity conversion in the retirement incomes system and also in relation to access to aged care. Governments may be tempted to resile from the social obligation to ensure that older people have enough resources for an adequate standard of living.

Is this desirable? – for COTA the answer for the short, medium and long term must be a definite no. For the very long term we cannot really say what will be good or bad policy but we are on safe ground to say that such an expectation will be out of bounds for at least the next 30 years.

An adequate retirement income – and reasonable quality of life- should be achieved for the majority of people without the use of equity from their home.

Home equity conversion must continue to be on the fringe of a national retirement incomes and aged care policy for a range of reasons:

not every one can or will wish to use home equity conversion to supplement an inadequate income either because they do not own a home or it has relatively low value;

the focus needs to be on encouraging positive behaviours throughout life around saving for retirement through vehicles such as superannuation;

governments on their part should focus on improving the present retirement incomes system and tackling some difficult issues in regards to superannuation and the age pension;

the cultural and psychological issues around home ownership for older people are very subtle and contribute to a sense of security and well-being for many people in older ages;

it may divert attention from developing appropriate housing and aged care policies for older people.

In addition, we hear a lot about the wealth of the baby boomers for instance and yet the facts of life for boomers as well as gen-Xers, Yers and Zers – is that not every one is doing so well or will do so well. Factors such as unemployment, precarious employment, divorce, social dislocation, high entry costs to the housing market and long term reliance on social security, are – and most certainly will be – the reality of life for many.

The inheritance of the family home does salvage and will salvage many of the upcoming generations, including many people in the pre-retirement age groups, from poverty and disadvantage in old age. There is "common sense" amongst older people with deep seated concerns about the risks faced by children and grand-children in the contemporary economic and social environment. They know that the family home will be needed.

However, there is no question that home equity conversion as "the right product" (discussed below) – will be a most a useful supplementary income or capital source for some or even many older people for whatever reasons that they wish to use it.

What governments need to do:

provide an appropriate regulatory framework and ensure consumer protection in all new products;

support small scale programs for low income older people (especially with low value housing) such as the program it ran in conjunction with the Advance Bank in the early 1990s or the Home Support Loan scheme available through Veterans Affairs with Westpac at a capped interest rate;

develop appropriate housing policies for older people which could include options around:

- sale of the home and moving to more appropriate housing: there are often significant barriers to people moving from a house – costs of removal, the physical aspects of moving premises

- ageing in place: helping people to remain in their own home or their community as long as possible

- community housing options: many older people dislike the idea of retirement villages. They want to live in the community with a wide range of people but often it is hard to get appropriate housing in the area they are used to

- provision of good quality public and social housing especially for low income people.

continue to ensure that there is adequate income support through the age pension system and adequate provision of health and aged care services;

treat income streams and assets acquired through home equity conversion benignly under the social security means test;

tackle some of the problems in the superannuation system;

provide additional income and housing assistance to low income older people, particularly those on the full age pension with little or no private income, with no owner- occupier housing or low value housing.

Getting the product right

Within the right policy framework for retirement incomes, aged care and housing, there is unquestionably a role for good home equity conversion products. The debate then clusters around the structure, form, delivery and cost to older Australians of products in the market place.

From a consumer perspective the issues are fairly simple but of course not at all simple to deliver:

older people first and foremost want to know that their housing tenure is watertight;

they want to contain the debt that they take on through any product – as we know the compounding interest factor in reverse mortgages can mean the total loss of equity in a home;

the ingoing and ongoing costs need to be fair, affordable and containable;

the interests of other family members and beneficiaries of wills need to be taken into account;

there must be a rigorous independent counselling process for all applicants for home equity conversion products.

In summary, older people want security and certainty and they wish to minimise risk. There are a wide range of dimensions and implications to this.

There are a further set of issues for any product relating to the actual value of a house and its long term potential for capital growth, taking account of economic cycles. Amongst older Australians there are vast discrepancies in the value of their housing but reasonable levels of equity in income levels and real living standards. Rural Australia is ageing and the value of many properties in country towns has withered as it has in some declining industrial areas. In the outer suburbs there are very modest housing values.

However, there has been extraordinary growth in housing value in the suburbs within 10-15 kilometres of the CBD of most capital cities.

Products need to be appropriately costed and packaged depending on housing value and growth potential. For some people with only modest housing value, privately delivered home equity conversion products may be inappropriate altogether but a small scale government guaranteed product may be right.

Conclusion

The ageing population presents unprecedented challenges and opportunities to both the private and public sector in Australia. We can see that the debate about home equity conversion converges around three areas:

consumer demand,

public policy,

private sector provision.

Australian governments will need sophisticated approaches and responses. This means first rate research, ongoing monitoring and evaluation and adaptation.

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Council on the Ageing (Australia)
Level 2, 3 Bowen Crescent, Melbourne Vic 3004
Tel (03) 9820 2655 Fax (03) 9820 9886
email cota@cota.org.au
www.cota.org.au