There’s no point in homing in on Age Pension asset test

Read my lips: this government will not include the value of the family home — even part of its value — in the Age Pension asset test. Neither will the next government, nor the one after that. We can talk about it, but it is not going to happen anytime soon.

The case put by some, mainly younger commentators, is it’s ­unfair to allow older people with valuable homes to receive the Age Pension, even if it’s a part pension. They should monetise the value of their homes in some way to provide for their retirements.

It’s essentially a value statement rather than one about sensible retirement incomes policy or fiscal sustainability.

There is something about an older person living in a valuable home — probably quite run-down but in an expensive area — and receiving some money from the taxpayer that riles these commentators. That their beneficiaries may receive the proceeds of the sale of the house when that older person dies adds to the ­incendiary impact.

The fact the value of the family home is assessed when calculating what level of subsidy an older person receives when moving into an aged-care home is overlooked in this analysis. Moreover, it is at this transition point that many older people do sell their homes to fund the accommodation bonds needed simply to secure a place in a home.

Evidently, it’s OK for others to use their superannuation lump sums and other savings to spend as they see fit: buy a caravan and new car, take a few trips, provide some money for the kids and the grandchildren. By bringing assets to just below the cut-off point for the full Age Pension, it’s the best of both worlds.

But let’s get back to Mrs ­Moneybags sitting in her expensive home in Vaucluse or Toorak and pulling in a part-pension. It turns out there is a close correlation between the take-up of the Age Pension and the value of the homes of elderly people. The more expensive the home, the much less likely it is for the owner to be receiving the pension. The statistics are not perfect because we can’t (thankfully) directly link age pensioners to the value of their homes. All we can do is infer the value of age pensioners’ homes from other sources such as their postcode and the median value of homes there.

But let’s consider the option of the value of a home above $1.5m being taken into account in the Age Pension asset test. This would affect at most 143,000 pensioners — mostly part-pensioners — out of almost two million.

So about 7 per cent of age pensioners would be affected, mostly in Sydney and Melbourne. Almost all age pensioners elsewhere in homes of comparable standard and position would be unaffected.

This feature alone represents a major political obstacle to such a change. Talk of different home value limits in different states and regions is just that; such a complicated rule would probably flounder on constitutional grounds.

Having dismissed the likelihood of home values being ­included in the Age Pension asset test, it is still worth having a discussion about how older people can source additional income or capital from home ownership.

Most home equity release products are terrible. They charge excessively high interest rates, particularly given the extremely low risk for the finance provider. The best rate available for reverse mortgages is a tad over 5 per cent. Given that new homeowners can find mortgages with a 3 or sometimes a 2 in front of the interest rate charged, there clearly is something going on.

Even the government-provided scheme, the Pension Loan Scheme, has unfavourable features, including a high interest rate and no guarantee against negative equity. It’s hardly surprising that the take-up of this scheme has been so low — fewer than 2000 participants.

The Australian Centre for ­Financial Studies also has noted the low take-up of reverse mortgages, with the latest figures putting the total number issued at about 40,000. The value of reverse mortgages makes up just 0.02 per cent of the total mortgage market. All of the big banks have vacated the reverse mortgage market, with small players taking up the slack. (Internationally, the take-up of reverse mortgages is also trivial.)

And a reasonable proportion of reverse mortgage holders pay the mortgage back. In these ­instances, the homeowner secures the mortgage for a particular purpose — not to fund ongoing living expenses — and then pays the money back.

Of course, one of the downsides of reverse mortgages is that the loan amount compounds across time. Given the high interest rates charged and the possibly lengthy duration of the loan, the impact is substantial. Consider a loan of $120,000 taken out at the age of 65. Twenty years later, the principal will have grown to $400,000, payable when the property is sold. Were the rate of interest to rise by two percentage points, the principal would be more than $650,000.

Some alternatives have superior features. Shared sale agreements involve selling a proportion of the home equity, with the homeowner having the right to stay there. When the home is sold the financier secures the predetermined share of the net proceeds. The market for these products is thin and there can be complications when there are occupants in the house who don’t have ownership of the property.

When considering retirement incomes policy, the issue of home ownership and the potential for equity release is a sensible issue. This is so even if it is extremely ­unlikely that the value of the home will be included in the Age Pension asset test.

But the equity release products available to older people — most notably, reverse mortgages — are costly, deficient and undersupplied. If older people were forced to take these up, the market would thicken and hopefully improve. But it would be a big call by any government, given the starting point, including the government’s own flawed scheme.