Housing is a hot-button issue in Australia at the moment. Booming property prices are making it increasingly difficult for first-home buyers to enter the market while at the other end of the age spectrum retirees are finding it difficult to exit.

“I keep hearing that people living in $3 million homes and living on the age pension should sell to young families and solve the housing crisis. Rubbish”, says Ian Day, chief executive of Council of the Ageing (COTA) NSW.

The conventional wisdom is that retirees should downsize to release some of the equity in their home. Not only will this provide them with extra cash to supplement the pension, it will free up housing stock and take some heat out of the market in the process. On the surface, this argument makes sense.

First-home buyers represent just 14.6 per cent of the owner-occupier market, according to the latest Adelaide Bank Housing Affordability report. With house prices rising faster than wages, it takes 36.2 per cent of median weekly household income to pay the average NSW mortgage, and 33.4 per cent in Victoria, compared with the national average of 31.5 per cent.

It’s true that many retirees are asset rich and income poor, with the family home their only asset. It is often too large, with a big garden and high maintenance costs. It may also be isolated from friends and services once the owner is unable to drive.

In practice though, even when retirees want to move their options may be limited. The downsizing dilemma

“There’s no doubt housing is an issue for seniors on several levels”, says National Seniors Australia chief executive, Michael O’Neill.

“The cost of downsizing, such as stamp duty and agent commissions, are an impediment as is the lack of suitable age-friendly housing stock in areas where people want to remain”, says O’Neill.

Say you live in Sydney’s Drummoyne or Melbourne’s Armadale. Your doctor is there, friends are nearby and you are comfortable doing your shopping there but the nearest retirement village is 25 kilometres away. It is a disincentive to move.

Others may decide to cash in their $1 million home in the city and buy a $400,000 place on the coast to enjoy their early retirement, only to find themselves cut off from health and other services as they become frail. Another potential disincentive to downsize is the age pension assets and income test.

The family home is exempt from the assets test but converting it into cash could reduce the amount of age pension a person receives. This is a complex area to work through and most people will need professional financial advice to navigate their way through it.

O’Neill believes part of the problem is that downsizing is not planned for earlier in the retirement process. Between the age of 55 and 65 the emphasis is on planning the financial aspects of retirement.

“What’s not happening is sufficient attention to planning around the next phase – particularly around what to do with the family home. Then people make decisions in haste because of other events such as illness or a fall, rather than in a planned way that gives you more control”, he says.

With the oldest of the baby boomers about to turn 70, this is an issue that is about to become even more urgent. Day says that age 70 to 75 is often when retirees’ modest super savings run out.

“They still want to travel and lead an active life so they think ‘maybe I should do something about the house”‘.

“They are making decisions around their contacts and networks, so they want to move to a smaller townhouse or unit in their area”, says Day. Unfortunately, they may be left without much change after the move. The wrong houses

Downsizers generally want at least two bedrooms so the grandkids and friends can stay over, or couples can each have their own space.

“They don’t want a one-bedroom apartment because they are spending more time inside their walls than they did in their youth”, says Day.

The problem then is finding suitable housing.

“There is a lack of diversity in retirement housing”, says Day.

Retirement villages are not available in all areas and apartments without lifts are not suitable for older residents. Older retirees in their 80s who are still living in their own home are less active and therefore better able to live on the age pension, but they may have practical or health-related reasons for moving.

Yet for all the obstacles facing older homeowners, even seniors advocates recognise that the issue of affordable, age-appropriate housing is not just an issue for retirees, it’s an intergenerational issue.

“Keeping the family home on a large block in an area where there is demand from young families is a loss to the broader community”, says O’Neill. Tapping into home equity

One of the reasons freeing up equity in the family home is such a challenge for retirees is the lack of market solutions. The major banks shied away from equity release products in the wake of the global financial crisis, leaving the sector with a lack of funding.

Equity release products fall into two categories. Reverse mortgages give you a loan in return for some of the equity in your home, while home reversion schemes provide a cash payment in return for a certain percentage of your home’s future sale price.

The industry was tarnished when many of the early reverse mortgages left elderly borrowers owing more than their home was worth. While most products nowadays offer a ‘no negative equity’ guarantee, banks have been slow to get back into the market or innovate due to reputation risk. The biggest provider of reverse mortgages is Commonwealth Bank, followed by Westpac, St George and Bankwest.

Bendigo Bank’s Homesafe is not a loan but a shared equity product which provides retirees with an upfront cash payment in return for a portion of the future sale value of their home.

Macquarie Bank re-entered the fray last year after a five-year absence with a reverse mortgage designed to fund the bond and/or ongoing costs for aged care accommodation. This allows aged care residents to keep their home and rent it out.

“In the aged care segment there is a lot of product development”, says John Thomas, chairman of the Senior Australians Equity Release Association of Lenders (SEQUAL).

Thomas says retirees should only look at products that allow you to live in your own home as long as you want. “Even people in their 80s often prefer to stay in their own home and use in-home care”, he says.

“We also insist all SEQUAL accredited members have a no negative equity guarantee,” he days. Case study: ‘If you’re on the pension with no money coming in you’re basically stuck’

Felicity Simmons, 78, is a single retiree who says she is stuck between a rock and a hard place. Her ageing body is telling her she can’t manage the steps to her first-floor apartment for much longer, but her budget is telling her she can’t afford to move to more age-appropriate housing. And it’s not for the want of trying. Simmons traded a three-bedroom home and garden in Canberra for her current two-bedroom Sydney apartment in 2006 to be closer to family. But Sydney’s higher property prices meant she was not left with any change, despite “downsizing”. For the past five years she has been thinking about moving again. “The stairs are becoming an issue now that I have a few aches and pains,” she says.

She began by looking at single-storey villas and apartments with a lift but the Sydney’s booming property prices have put these options out of her reach. At auctions she is outbid by wealthier retirees downsizing and young families settling for a unit or villa as a stepping stone to a larger home.

So she attended a few retirement fairs organised by aged-care providers marketing retirement villages. While the units were reasonably priced she found that the ongoing fees were up to twice what she currently pays in strata management fees and there were hefty exit fees if and when you need to move into high care.

“As an alternative to Sydney I thought I should go to the Central Coast like everyone else. I went on a bus tour of villages but prices were not much different to Sydney. At the moment I can drive but there will come a time when I can’t so I need to be near public transport. “All my income is from the age pension so I can’t get a loan and I can’t get work because no one wanted me once I turned 70.” “I feel grateful for the pension but I would like to work. I’ve been looking at starting an internet business writing e-books”, says Simmons, who worked in education in Australia and overseas for many years. “If you’re on the pension and have no money coming in you’re basically stuck”, she says. Action Plan

Housing strategies for seniors:

  • Stay in the family home.
  • Downsize to a smaller residence such as an apartment or strata title villa.
  • Explore community options such as retirement villages, residential parks.
  • Let the family home and rent somewhere cheaper.
  • Sell or let your home and move into residential aged care.
  • Sell and move in with family or to a granny flat.
  • Stay and draw income from an equity release product.

Source: COTA NSW

Posted by Money Manager (Fairfax) on 8th April, 2015