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
- Renting
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.
I guess there will be a push to include the family home in some form. But it would be a brave government to try it. Witness the franking credits fiasco. A sensible policy hounded out of existence. Similar with negative gearing and CGT discount amendments.
It will be a very “game” Govts that includes the price of the family home into the assets test for aged pension purposes. That said , I think it has to eventually happen . The Govt cannot continue to fund people with the aged pension when they sit on an asset ( family home) that is above 3or 4 Million $’s . I think a realistic starting point to affect the pension is when the house price is $2.5 Million or above .
I put forward for your respectful contention that to maintain fairness and equity in our society, we have to avoid a large discrepancy in wealth.
In my opinion, only a person who owns a PPR up to the value (presently) of $2.5 million should be eligible for aged pension. We must encourage retirees to downsize and move into suitable alternative accommodation and so ease the housing crisis.
It is probably time for consideration of a part inclusion of the Family home to be included in the Assets Test for all welfare recipients. The desire for generational transfer of wealth on the death of the owners is now beyond the pale. At least the Gov’t should consider the application of the Capital Gains Tax when inheritances are distributed. This would at least reduce the burden on the community as a a whole , if it is accepted that Gov’t use monies collected for the benefit of the whole of Society
I would support a first step of including homes worth very high amounts…say 5 million dollars being included in a calculation.
Hello…my opinion…I think that for family houses above a certain value…say $3m….any pension paid should be a “charge “(ie a future liability) against the property …such that on death or sale the govt is repaid the accumulated amount of the “charge”.
The comments on the age pension rated against the PPR as an asset when the ABS details millions in 2003 quarter then in 2010 it rated in billions now it is rating in trillions then it is a hypothetical fairness the age pension to doubled and tripled since the tax, if the PPR benchmark attracts CGT ? when world bank/IMF covid relief loans negated with Pharmaceutical lobbyists (“the lender”)are hedging into trillion category with boosta for life Dr Fauci quoted.
Pfizer alone last Quarter 29 billion. house prices are RELATIVE if the downgrade for pensioners sellout and cant buy back in down grade to what level the equity becomes cash and the pension reduces dramatically maybe even to zero ,,, it is adead duck for any politician to contemplate protesters 140k on weekends in one place hyde park/martin place politically savvy futurists who will become politicians one day and not forget and remember.