The finance sector in Australia has evolved over 30 years from a situation where consumers could not access as much credit as they would like for bidding up house prices, to one in which the credit is easily available, resulting in a mature (or possibly over-priced) housing market.
At the same time, Australia’s extraordinary performance through the GFC means that retirees who held assets rather than liquidate them during the crisis have recovered much (though not all) of their personal wealth.
We now have an increasingly top-heavy demographic profile, with older Australians sitting on large assets in those two main baskets: houses and super.
What is left when these Australians die is mostly inherited by the next generation (subject to various taxes). The almost unique market conditions that made the boomers so asset-rich (though not always income-rich) won’t be repeated. Like a juicy meal passing through a python, we can see the lump moving through the economy – and there is no second lump following it.
This once-in-a-life time wealth transfer is being managed by individuals, and some are doing a very good job of balancing their own needs as retirees with the desire to leave a nest-egg for their children and grandchildren.
However, it is a mistake to think that most Australians are doing a good job. As I argued previously, half of a retiree’s assets are often thought to be off-limits and unable to be enjoyed. It’s as if there was a law mandating that half one’s assets must be passed on to younger Australians who didn’t actually earn them.
That wouldn’t matter so much if it weren’t for the fact that a lot of oldies don’t have the retirement income they need for a dignified dotage.
And as described at the weekend, some Australians have woken up to the fact that they can withdraw capital from their paid-off home, live better lives, or even enjoy seeing their money fund useful things for their descendants while they themselves are still alive, such as school fees or house deposits.
Through the three main methods of equity withdrawal – remortgaging, reverse mortgaging, or ‘selling’ part of one’s home to a third party (such as through the Homesafe service in which Bendigo Bank is a 50 per cent shareholder) – a few Aussies are balancing their needs with the needs of the next generation.
The problem – and the political opportunity for the party that can solve it – is that most senior home-owners are not doing this. Indeed, many retirees will be living through hardship, or watching their descendants living through hardship that could be solved with a few strokes of a pen.
Ian Harper, former Fair Pay Commissioner and now a partner with Deloitte Access Economics, says the choice facing Australians is a “lag” in the transfer of assets that could be “smoothed” by a sensible approach to mobilising the capital tied up in the housing market.
Rather that the children of baby-boomers getting a largely untouched dollop of money when their parents houses are sold in, say, 15 years' time, they could receive a smaller dollop and watch their parents leading happier lives in the meantime.
That might upset a few avaricious youngsters, but even the money-grabbers would benefit by large sums of money being spent in the domestic economy, helping create jobs and wealth for gen-X and gen-Y job-hunters.
However, there are problems; the kind of problems only government (right or left leaning) can solve.
Reverse mortgages and other equity release schemes have been used to rip off oldies abroad. Mis-sellers got away with murder in Britain in the 1980s, before the sector was regulated by the UK’s Financial Services Authority.
The now-regulated UK sector is growing at around 15 per cent a year, according to the Financial Times, with the average amount drawn-down by householders being £57,107.
The second problem with liberating similar amounts, whether in the UK or here, is that the investors who buy these ‘parts’ of people’s homes need an attractive risk/return profile to hand over the money.
Housing market volatility could, based on GFC experiences, leave investors shirtless.
And that, says Harper, is where politicians come in. Harper would like to see the government guaranteeing a new securities market – let’s call them Equity Release Bonds – by effectively issuing put options on bonds that banks (or others) create by securitising 'parts' of homes.
That would mean if a housing market crash did occur, the government would be buying an investor's $100 bond for, say, $80 and holding to maturity, by which time the asset is likely to have recovered in value. The US government did something similar with its Troubled Asset Relief Program (TARP), which ended up making a profit for taxpayers.
So what at first glance appears to be a socialist plot to ‘steal’ the value of retirees’ homes would be no such thing. Rather, it would use the government’s potential borrowing power (that would only need to be used in a housing crash) to encourage investors to buy parts of retirees’ dwellings.
The creation of such a market would boost consumption spending in everything from retiree-friendly tourism to medical equipment and home renovation. And it would allow those who amassed the wealth to spend more of it, while leaving an appropriate-sized chunk for the next generation.
Such a scheme would also take pressure off the health and pension spending of federal and state budgets, but only if housing assets and superannuation assets were brought together when assessing individuals’ pension and health care entitlements.
The bulge in the python is there, and it will move along to the next generation regardless. If it does so smoothly, all parties – old, young, and the taxpayers supporting a bloated federal budget – will benefit.
However, if Harper’s “lag” is allowed to occur, there will be a period of unnecessary financial stress for many, followed by a sudden transfer of wealth.
When pythons are involved, smooth is always better.
When structural change is underway, it makes sense to swim with the tide. And as described in a series of articles over the past week, structural forces are moving the major building blocks of Australian prosperity.
That change is occurring both naturally, through an ageing population, and unnaturally through the tax/superannuation system, and has resulted in a misallocation of resources that affects the lives of millions of people every day.
The problem, and the solutions to that problem described below, are both an enormous political opportunity for the party that ‘swims with the tide’, but also a very difficult argument to make to voters.
To understand, in tangible terms, what needs ‘fixing’, let’s assume a couple, Mr and Mrs Smith, in their mid 70s with a superannuation fund worth $500,000 and a house within 15km of a capital city CBD.
Once upon a time their ‘cheap’ house was on the periphery of the city, but it’s now worth $1,000,000 because it is seen as ‘inner city’ in comparison to newer suburbs further out.
The Smiths draw an income from their super fund, topped up by the pension, but struggle to make ends meet themselves and therefore to help their two adult children and four grandchildren with the kind of gifts any grandparent would like to make.
But then one day, the Smiths see an ad for a ‘debt free’ equity release product in which the bank will buy a stake in their home (at a large discount, in the way bonds are bought at a discounted rates to reflect the ‘interest’ they will pay over time) and decide to ‘sell’ half their house.
Based on normal actuarial principles, a $500,000 stake might be worth, say $350,000 to a bank that has to hold the asset to maturity – and manage risk, particularly ‘longevity risk’.
So the Smiths now have: $500,000 in super, $500,000 in equity in their own home, and $350,000 to consume themselves, to use for the benefit of their children/grandchildren or invest elsewhere.
The beauty of such a scheme is that it allows the Smiths to stay in their own home until death/old age catch up with them. Same neighbourhood. Same friends. And a better standard of living – expensive renovations such as a stair-lift or walk-in bath are now affordable, and Mr Smith will never cut the lawn himself ever again.
There is, essentially, a huge pool of money held back by cultural values (the desire for home ownership) or fear of the future. Allowing that pool to flow to more useful places, without fear/distress to old Mr and Mrs Smith, is something that can be done by the free market, but can be greatly assisted by a government response.
So what is holding the wall of money back?
Firstly, as Ian Harper suggested (A huge opportunity in retirees' hidden wealth, November 12) the expansion of this kind of product by banks and other financial institutions would be greatly assisted by the creation of a government-backed securities market into which half the Smith’s home can be sold.
Equity Release Bonds (if we can call them that), in normal times would carry little unexpected risk. However, the threat of a GFC-style property crash cannot be ignored, and the government’s role would be to offer a ‘put option’ on each bond – a guarantee to buy them at, say, 80 per cent of their value, and hold them through a period of instability in ways private finance houses would not be able to.
Secondly, a push to liberate the capital locked up in homes would shine a light on the elephant in the room – that Australia has two incongruous tax regimes covering the family home and super nest egg.
For purely cultural reasons, we’re happy to pay for our homes in after-tax dollars, and take the capital (often after death) capital-gains-tax-free. In super, by contrast, workers on decent salaries/wages get a massive tax rebate on every dollar put into their fund, pay tax on earnings within the fund over time, and (despite Labor’s plans to change it) take tax-free income at the other end.
Put together, that is a dog’s breakfast of a tax system. Super tax concessions, which still largely follow the Costello model left by the Howard government, are massively regressive and work against both the principle of a ‘progressive tax scale’ and against the principles underpinning the Hawke/Keating move to create the super guarantee in the first place.
As economics writer Leith van Onselen pointed out recently, if you believe in a progressive tax scale, then how does it make sense to give an effective super tax concession of 17.5 per cent to somebody earning in the $37,000-$80,000 bracket, while giving a full 30 per cent to every dollar earned over $180,000? (See his full argument here.)
The super guarantee was supposed to take normal-income workers out of the pension system by forcing them into long-term investments. Instead, it is heavily skewed to giving tax breaks to wealthier Australians and, worse, still allows a lot of income to be ‘laundered’ through the super system in the last few years of work and then withdrawn a short time later – not a long-term investment at all.
That’s why a reform to unlock housing wealth would also be a reform to overhaul our nonsensical super/housing tax regimes. And that is why I argued on Tuesday that this reform would be as grand a project as creating the super guarantee in the first place, or getting the GST through parliament – very, very difficult, but massively beneficial to the nation.
There is one other factor holding this reform back – a very human factor.
At present, many baby boomers plan to have their assets divvied up by their descendants after they die. That way, they will never see what little monsters their children can turn into when they scrap over the will.
As one homelender told me last week, a large number of people wishing to release equity from their home ultimately give up when they discuss it with their kids and discover the family conflict it can cause.
To my mind, that creates an opportunity for a new kind of financial advice.
By way of analogy, in a divorce scenario a lawyer will tell you what you can screw out of your ex-partner.
However, in recent years divorces have tended to be governed less by combative lawyers and more by mediators, whose primary question (as it should be) is “what is best for the children?”
A similar service could quite easily be offered to Mr and Mrs Smith. Their $350,000 of released equity could come with sound financial advice – taking into account, in an unbiased way, what’s best for the various family members expected to get a slice of the pie. A bit for school fees, a bit for South Pacific cruises, a bit for a new car.
That is not a job for government, but getting the market up and running is.
The largest intergenerational wealth transfer in Australia’s history has already begun. Some refer to this process as a ‘generational war’ – but it doesn’t have to be that way.
Wars usually start because resources have been locked in the wrong place for too long.
The political leader that can offer a smoother transition through a government-backed equity release market, would not only be averting a financial ‘war’ - they’d be making Mr and Mrs Smith and the decendants happier, healthier and more prosperous.
1. RM’s should be provided not by the banks but by Centrelink, as an extension of the Pension Loan Scheme. The best solution.
2. The PPOR needs to be inc in the means test for any amount over $750K for pensions eligibility and once again RM’s provided to those over these limits to get income.
3. Land tax also needs to be introduced at the same time and pensioners could accrue the tax till death.
4. Death tax on amounts over $750k and rural/business ongoing assets excluded.
1. RM’s should be provided not by the banks but by Centrelink, as an extension of the Pension Loan Scheme. The best solution.
2. The PPOR needs to be inc in the means test for any amount over $750K for pensions eligibility and once again RM’s provided to those over these limits to get income.
3. Land tax also needs to be introduced at the same time and pensioners could accrue the tax till death.
4. Death tax on amounts over $750k and rural/business ongoing assets excluded.
I know - Let's just have a wonderful utopian system where everyone works for the gov to the max of their ability for free and the gov gives everyone everything we need for free. Oh damn; The Russkies tried that and it doesn't seem to work? Jeez you're a dill Pauk.
A Professional Demographer to an amateur demographer:"negative natural increase will never outweigh the positive net migration"
Herbie So you prefer a system where the rich get richer and the poor get poorer? Where a lone pensioner can live in a $5 million home, have $1 million in cash and still get a part pension?
Herbie So you prefer a system where the rich get richer and the poor get poorer? Where a lone pensioner can live in a $5 million home, have $1 million in cash and still get a part pension?
This is the second time I've told you to go away Pauk (Alex edited that to sound WAY nicer than what I said!) - With the first being on that other site where you called yourself Demografix. You were a dill who was prone to saying extraordinarily silly things there/twisting stuff. And still are.
PS: I prefer systems that 'work' and encourage people to work. 'N all you can come up with is taxing the middle class into being as disinterested in working as all the others that fools like Whitlam 'n those who've followed him made disinterested in working.
1. RM’s should be provided not by the banks but by Centrelink, as an extension of the Pension Loan Scheme. The best solution.
2. The PPOR needs to be inc in the means test for any amount over $750K for pensions eligibility and once again RM’s provided to those over these limits to get income.
3. Land tax also needs to be introduced at the same time and pensioners could accrue the tax till death.
4. Death tax on amounts over $750k and rural/business ongoing assets excluded.
Give up Paul, it's just crap and by now you must know that. None of your wacky aged quake theories will work out as you predict.
Any expressed market opinion is my own and is not to be taken as financial advice
1. RM’s should be provided not by the banks but by Centrelink, as an extension of the Pension Loan Scheme. The best solution.
2. The PPOR needs to be inc in the means test for any amount over $750K for pensions eligibility and once again RM’s provided to those over these limits to get income.
3. Land tax also needs to be introduced at the same time and pensioners could accrue the tax till death.
4. Death tax on amounts over $750k and rural/business ongoing assets excluded.
Pauk - here is an example of why your idea is rubbish.
Say I had a working class grandma in Australia that had lived in the family home since the 50s. That home is in Birchgrove with water views and worth $4m. You would exclude her from the pension and make her pay land tax, ie force her to sell so that some bankster can snap up her home and she can move to a unit in Summer Hill ($750k). Unless you are the bankster, in which reality is any of that a good idea?
PS I don't have a grandma in Australia or a family member with a $4m Birchgrove house.
“You Keep Using That Word, I Do Not Think It Means What You Think It Means” - Inigo Montoya
Pauk - here is an example of why your idea is rubbish.
Say I had a working class grandma in Australia that had lived in the family home since the 50s. That home is in Birchgrove with water views and worth $4m. You would exclude her from the pension and make her pay land tax, ie force her to sell so that some bankster can snap up her home and she can move to a unit in Summer Hill ($750k). Unless you are the bankster, in which reality is any of that a good idea?
PS I don't have a grandma in Australia or a family member with a $4m Birchgrove house.
barns Grandma would get a RM from Centrelink for her living expenses and her land tax, although for pensioners the land tax could accrue till the property was sold.. She would not have to move at all.
She certainly should not get a tax payer pension when she lives in a $4 million home.
I wonder how many old people live in $1m houses and get the pension?
I'm no fan of the boomers but it's not like the media told them about all the loose money and credit that was primarily responsible for their house being ridiculously over valued. Biblical level fail.
There's never been one story about it. Ever.
Also, "rich" people, pay more tax. Lots, and lots and lots more, and then some.
stinkbug omosessuale Frank Castle is a liar and a criminal. He will often deliberately take people out of context and use straw man arguments. Frank finally and unintentionally gives it up and admits he got where he is, primarily via dumb luck! See here Property will be 50-70% off by 2016.
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