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Australians not feeling supported by the retirement funding system

Josh Funder   CEO - Household Capital
February 3, 2020 2 MIN

03 February 2020: Household Capital, an independent, specialist retirement funding provider has completed its submission to the Retirement Income Review in response to the government’s consultation paper released in November 2019.

The purpose of the Retirement Income Review is to ascertain the degree to which retirees are supported by the three pillars of Australia’s retirement system; superannuation, the Age Pension and other savings, including home equity.

However, as evident from a recent survey, Australia’s retirees do not feel fully supported by the Australia’s retirement funding system.

Household-Capital-Retirement-Income-Review-submission2

The three pillars of retirement funding have not, to date, adequately supported all Australians for several reasons:

  • Australians are living longer, a fact that’s often communicated with rhetoric around this being an economic burden or threat
  • Australia’s retirement system was not designed to support retirees for 20-30 years of life beyond work
  • Superannuation came in too late for most baby boomers; accordingly, the median account is $200,000 at retirement (less for women), which provides income for around 10-15 years
  • The Age Pension is inadequate as a sole source of retirement funding
  • Home equity, the largest pool of savings for most retirees, has not been appropriately and effectively made available to improve retirement funding.

Household Capital’s CEO Dr Josh Funder commented, “By helping retirees to better access and responsibly use home equity for retirement funding, several important areas of social and economic policy can be addressed.”

“Retirees are a large group with significant inaccessible wealth in home equity and major unmet needs in consumption for wellbeing.”

“By unlocking home equity to improve retirement funding, we can enhance both the quality of life in retirement and economic activity.”

Household Capital has made several recommendations to the Retirement Income Review, including:

  • The government’s ‘downsizer measure’ permits the concessional treatment of $300,000/$600,000 (single/couple) from the proceeds of downsizing. Older Australians should be incentivised to use their home equity to improve their retirement funding by having this measure applied to all forms of equity release. This improved policy would support ageing and help the economy with no additional tax expenditure.
  • Australian retirees feel abandoned by the banks and need access to capital and income throughout the course of their retirement. Home equity can provide both capital and income, and help retirees mitigate longevity and contingency risks.
  • There should be a requirement for all superannuation funds to offer a comprehensive retirement income package to members. This would offer appropriate products to ensure retirees have adequate retirement funding and should include access to home equity retirement funding. This should be a legislated minimum service provision for all super funds.
  • Reverse mortgage brokers are exempt from a best interest test and prohibition of commission based sales. Mortgage brokers selling reverse mortgages should not be exempt from tougher regulations that apply in respect of financial advice.

“The broad policy and legislative framework for responsible access to home equity is in place, is comprehensive and sound,” said Dr Funder.

“There are no major barriers to the transformation of home equity to play a foundation role in funding retirement.”

“Australians know that the family home provides retirement lifestyle, wellbeing, housing and funding. The federal government must support the retirement funding sector to deliver better outcomes in retirement.”

Exclusive launch: the Household Capital Index for Home Equity Retirement Funding

Josh Funder   CEO - Household Capital
January 22, 2020 3 MIN

22 January 2020: – Household Capital has launched a new Australia-wide property index – the Household Capital Index. For too long, property indicators have focused on historical data and the short term outlook – how good is your home to flip or downsize next year? The Household Capital Index provides homeowners with a different view: how good is your home to provide long-term retirement funding?

Australian retirees are living longer than ever. Most baby boomers don’t have enough superannuation to trust that it will get them through,” said Josh Funder, CEO of Household Capital.

“The Household Capital Index helps Australian homeowners have confidence in drawing on their own home equity to provide long-term retirement funding. Overall, the analysis shows that over 98% of the sample postcodes have consistently delivered positive home equity to support retirement funding over the past 40 years – most retired Australians can rely on the home equity they saved.”

The Household Capital Index ranks postcodes and suburbs across Australia according to how likely the current value of home equity can provide long term retirement funding. All postcodes above 50 are high quality home equity areas where there is strong confidence in the long term outlook.

How will this help Australian retirees? A higher relative Household Capital Index score means that homeowners can expect to have a greater part of their home equity available to them to draw on over the course of their retirement. A higher Household Capital Index score doesn’t change how much home equity is available at any given age, but it does help people to draw responsibly on their home equity now and in the future to self-fund their retirement.

“We’ve modelled historical home equity performance across Australia and added a range of forward looking factors which are specific to long-term home equity retirement funding,” said Funder.

Some of the key factors taken into consideration are:

  • Historical performance: 40 year nationwide performance of suburb-specific home equity performance
  • Negative equity risk: statistical analysis of the intersection of property prices with interest rates including historical property slumps
  • Macro factors: immigration, urban planning, economic trends
  • Localised retirement housing market outlook: sub-postcode supply, demand and volatility for retirement housing
  • Transacted and untransacted property: includes housing which is not going to be sold or downsized
  • Economic drivers: local employment and wealth parameters
  • Housing stock: long term patterns of property mix including apartments and houses

The Household Capital Index integrates data from a wide variety of sources including CoreLogic, Australian Bureau of Statistics, Reserve Bank of Australia, National Seniors, major superannuation funds, and Household Capital.

“There is no average baby boomer and each home is unique,” said Funder.

“Australian retirees are making their own plans to live well at home over the longer-term. Each household should understand their own needs and plans. Australians can have confidence in their own home equity retirement funding.”

Highlights

  • Forrest ACT: high incomes, stable federal employment make home equity in Forrest the leading suburb in this sample
  • Kew & Red Hill: a couple who have a family home in Kew and a holiday home in Red Hill could have greater confidence in their home equity retirement funding than a couple with a home in Toorak and holiday home in Portsea (below)
  • Diverse suburbs: from prestige harborside Rose Bay or inner city Paddington to Pennant Hills and north coast Tweed Heads, home equity provides a strong foundation for retirement funding. In Victoria, outer suburban Box Hill, Springvale and Epping provide a positive longterm home equity outlook.
  • Seaside Sandringham VIC is at least a good a place to retire using home equity retirement funding as bayside Albert Park VIC
  • Frankston, Mildura and the Mornington Peninsula in Victoria have similar profiles for the purposes of long-term home equity draw down.
  • Toorak & Portsea: while a couple owning a home in Toorak and a holiday house in Portsea might have greater total home equity than the couple in Kew/Red Hill, higher top-end volatility in Toorak and Portsea makes home equity in those suburbs less stable in the longer term, suggesting a slightly more conservative approach to retirement funding.
  • Karatha, WA, is well below 50 on the Household Capital Index. A fly-in, fly-out workforce, volatile employment market, few retirees and remote location make Karatha a less reliable area to use home equity retirement funding.

new south wales - home equity by postcode

Victoria -home equity postcode

queensland home equity by postcode

other states and territories home equity by postcodeall state home equity by postcode sample

Family home recognised as third pillar of retirement funding by federal retirement income review launching this week

Josh Funder   CEO - Household Capital
October 19, 2019 1 MIN

15 October 2019: The family home could become a significant part of Australia’s retirement funding solution, after home equity was specifically included in the terms of reference for the federal government’s review of retirement income.

The first major inquiry into Australia’s retirement savings system begins this week and the three person independent panel has been tasked with identifying the role played by “voluntary savings, including home ownership” in Australia’s retirement funding system.

The family home’s inclusion was welcomed by Dr Joshua Funder, CEO and Managing Director of independent specialist retirement funding provider, Household Capital.

“For most Baby Boomers, voluntary savings outside of superannuation means the equity in their home. For Australian homeowners entering retirement, available home equity can double their superannuation and help fund their retirement for years to come.” said Dr Funder.

“As the federal government has affirmed in the terms of reference of the recently announced retirement income review, the family home is much more than housing. It’s a store of retirement savings in its own right that remains largely untapped as Australia looks for ways to adequately provide for retirees in a way that’s fiscally sustainable.”

With the Prime Minister and Treasurer publicly repeating their assurance that the government would "never" include the family home in the asset test for the age pension, Dr Funder says our homes can become a crucial part of the third pillar of Australia’s retirement income system. Their specific inclusion in the terms of reference reflects a shift in thinking about the role the family home could play within Australia’s complex retirement income system.

“Few people have much “voluntary savings” outside super and their home, so it makes sense for the third pillar to explicitly include the biggest pool of super savings in Australia – the $1 trillion already saved by retirees in their home equity” said Mr Funder.

“The notion that your nest is also your nest egg would be no surprise to the 4.5 million retired homeowners whose home equity is more than their superannuation savings.”

Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available on request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434. Australian Credit Licence 391876.

UNSW Business School to examine reverse mortgages

Josh Funder   CEO - Household Capital
June 11, 2019 1 MIN

11 June 2019: – Researchers from UNSW Business School will investigate behavioural and other issues behind the low uptake of reverse mortgages in Australia.

A reverse mortgage is a loan that enables homeowners to access their home equity; the homeowner can borrow without having to make repayments while living in the home.

Home equity is typically the largest component of total household wealth, so a reverse mortgage can complement superannuation and the age pension as a financial resource in retirement.

Senior Research Fellow Dr Katja Hanewald and Professor Hazel Bateman will investigate theoretical and empirical aspects of reverse mortgage demand and product design.

“While economic theory predicts that households would demand reverse mortgages to improve retirement funding, the take-up rates for reverse mortgages are low in Australia and internationally,” said Dr Hanewald.

The Business School is funding the two-year research project with industry partner Household Capital, which offers services to enable older Australians to combine their superannuation, pension and home equity to provide retirement funding.

The research team will investigate the impact of behavioural factors as an explanation for subdued reverse mortgage demand. “Combining our research track record and Household Capital’s industry expertise, we will design, and field test, an online experimental survey to study the role of mental accounting in the demand for reverse mortgages,” Dr Hanewald said.

“By investigating behavioural explanations to the ‘reverse mortgage puzzle’, this research will address demand and supply side barriers to further development of a reverse mortgage market in Australia and internationally.”

Dr Joshua Funder, CEO and founder of Household Capital, said: “Overseas markets have been expanding rapidly to provide access to home equity to fund retirement.”

“We’re delighted to work with UNSW Business School to understand the needs of Australian retirees and how we can improve access to home equity to improve retirement their funding.”

For further details contact
Dr Katja Hanewald: [email protected]

Australian retirees have inadequate access to their savings

Josh Funder   CEO - Household Capital
May 13, 2019 2 MIN

13 May 2019: Household Capital, an independent, specialist retirement funding provider, said yesterday that a major issue facing Australian retirees was inadequate access to savings.

Josh Funder, Household Capital’s Chief Executive Officer, said retirement funding adequacy was a very real issue facing retired and soon-to-be retired Australians.

Mr Funder was responding to a number of recent news articles, including research by Roy Morgan, that suggests an increasing number of Australians intend to retire despite inadequate retirement savings levels.

“Household Capital believes that’s only half the story – the other, critical piece, is inadequate access to savings,” said Mr Funder.

Inadequate savings?

According to the Roy Morgan research, the average gross wealth (total assets excluding owneroccupied homes) of intending retirees is $299,000.

The average debt level for this group is currently $27,000; while not significant, it reduces average net wealth to $272,000, a level noted by Roy Morgan that’s generally considered inadequate for selffunded retirement.

“Roy Morgan’s figures tie in with our research; for many Australians, compulsory super started too late into their working lives,” said Mr Funder.

More than 5.5 million so-called Australian baby boomers (those people born between 1946 and 1964) have entered or are about to enter retirement.

“As subsequent waves of baby boomers approach retirement, inadequate funding looms as a major socio economic problem that must be addressed,” said Mr Funder

Savings tied up in the family home

For most Australians, the majority of their wealth is tied up in their family home. At retirement, the family home plus superannuation may be worth around $1 million, but most of this wealth is locked away and largely inaccessible to fund retirement needs.

“Most Australians have done a great job paying off their mortgage and effectively ‘saving’ in their family home,” said Mr Funder.

“In fact, there’s nearly $1 trillion in untapped home equity owned by Australian retirees.”

“Given that most retirees wish to stay in their own home as they age, this untapped savings is a valuable resource that could be used to improve retirement funding.”

Canada and the U.K. have a similar demographic composition to Australia – an ageing workforce with a large baby boomer cohort entering retirement. In each of these countries, there has been strong growth in home equity release being used to fund long-term retirement income streams.

“This has not been the case in Australia where traditional bank reverse mortgages have failed to meet the long-term needs of retirees for several reasons,” said Mr Funder.

“Firstly, home equity funding of retirement was seen as a form of last resort financing for many older Australians and were often used to fund inappropriate spending for potentially distressed borrowers.”

“Importantly, access to home equity in Australia was never directly linked to long-term financial planning or financial advice.”

A new approach to retirement funding

Despite this failure, the fact remains that many Australians need to utilise their home equity, albeit in an efficient, responsible and sustainable way if they are to enjoy a comfortable retirement.

“Clearly a new and innovative approach is required to meet this major unmet community need and delivered in the context of financial advice and long-term retirement planning,” said Mr Funder.

“For this model to successfully meet long-term retirement needs, there should be a focus on transferring home equity to appreciating assets, such as superannuation.

“This way, retired Australians will achieve retirement funding adequacy and not be solely reliant on the government’s Age Pension to fund their retirement.”

Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available on request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434. Australian Credit Licence 391876.