How long will the family home remain exempt?
It’s hard to avoid the extensive media coverage of property price increases. There’s a reason for this and that’s because the 6.7% increase in the June quarter this year was the largest since the Australian Bureau of Statistics (ABS) started keeping the Residential Property Price Index (starting with September 2003 quarter).
Are these increases a good or bad thing for Australian retirees?
As always, the answer is, it depends.
When it comes to retirees and residential property, you are likely to fall into one of three distinct groups:
- Homeowner with no mortgage
- Homeowner with mortgage
If you are a homeowner without a mortgage, your asset is increasing in value. So the fact that prices have risen in every state and territory is music to your ears. That said, it has come about due to a confluence of two trends – record low interest rates and a scarcity of housing stock. Low rates mean you may be disappointed in returns on cash deposits. Scarcity of stock means that you may also feel sympathetic towards adult children and grandchildren who are wondering if they will ever manage to buy a home.
If you are a homeowner with a mortgage, you will probably be enjoying the lowest rates on your loan for a very long time. But you are probably also aware that low rates will inevitably end – most likely late 2022 or early 2023. But as long as you can cover your repayments, you too will be enjoying an increase in your net asset level.
If, however, you are renting, you will be aware that the low housing stock is making rental properties scarcer than ever, and you will perhaps be facing higher rents. This is very difficult if you are on a full Age Pension, with approximately one third of your income going on rent.
Will the home remain exempt?
An interesting statistic is that between 65-75% of Australian retirement wealth is held in the family home.
When we combine this fact with the ‘macro’ trend of an ageing population, we reach the point where some 5.5 million baby boomers are holding $1 trillion in housing assets.
The recent Intergenerational Report (IGR) published by Treasury notes that the Age Pension will represent about 2.3% of the GDP in 2052.
Regardless of political hue, most Australian governments have expressed ongoing concerns about the sustainability of funding the Age Pension ad infinitum and will look for ways to make it more sustainable . Of course, governments have a lot of different fiscal levers at their disposal to this.
But the very thought of a $1 trillion asset class which is exempt from Age Pension entitlement rules and death duties must be tempting.
As previously reported, the recent Retirement Income Review classifies this pool of wealth as one of the three pillars of retirement.
With the Reserve Bank on record that interest rates are unlikely to rise in 2022, expect house prices to continue to rise.
Which means that this asset pool will be even larger when the awful ramifications of the eyewatering Commonwealth government debt, increased to counter the economic challenges of the pandemic, become clearer. At some stage this debt will need to be repaid.
And when it does, it is highly likely that the exemption of the family home from Age Pension eligibility will come under much closer scrutiny.
It will take a strong-willed Treasurer to resist the urge to at least tinker with the rules; perhaps making any home valued above the median price subject to a part valuation within the assets test.
And should the rules on family home exemption be changed, the next huge question will be whether the current total exemption, which applies to Australia’s 3.5 million Age Pensioners, should be ‘grandfathered’ (meaning that this change is not retrospective).
There’s a lot to think about here.
What say you?
Do you believe primary residences above a certain value should be treated as assets for the purpose of the Age Pension?
Where does your property value sit in relation to the median price in your city?
Are you unsure of the current assets’ threshold limits? Run your sums here.