Virtual Summit Shorts: Using housing wealth to fund retirement income

Eric Ranson, Tin Long Ho and Katja Hanewald looked at various ways in which retirees can use their housing wealth to buttress their retirement options, including reverse mortgages, home reversions and arbitrage options in the session ‘Optimal Use of Housing Wealth in Retirement/Using Property to Create Retirement Incomes’.

Tin told the audience that despite the Retirement Income Review finding that housing should be used as a consumable asset, and it comprising the largest proportion of assets at retirement in Australia, he rarely saw people utilizing their housing wealth for retirement effectively, if at all.

Commercial reverse mortgages, the pension loans scheme, downsizing and home reversions were some options available for using housing wealth in Australia. Home reversions, in which part of the current home equity was sold to third party buyers, was less popular in Australia.

Tin’s paper concluded that when the retiree was asset rich but cash poor, reverse mortgages were the best way to spend down home equity, followed by home reversion approaches. Downsizing the home was found to be the least effective approach to using housing stock.

However, the utility gain from using housing wealth for retirement progressively diminishes as the retiree has access to alternative sources of financial wealth, Tin said.

Access to other financial wealth, a lack of financial literacy, and behavioural factors such as mental accounting all contributed to home owners’ hesitations at using their housing wealth to fund their retirement.

Eric told the audience there were also opportunities to use arbitrage in residential properties to fund retirement.

Arbitrage involves taking the same property asset and dividing it into both a land asset and a building asset, with two owners overseeing both assets. The landowner would transfer ownership rights to the building to the building owner in return for two thirds of the property price via a long-term lease agreement. The landowner would then become a passive investor with a defined regular income. The building owner would then become the defacto landowner, with agreed land rental.

This approach would solve the housing affordability crisis, and provide an attractive, secure long-term asset suited to retirement savings. Day to day costs of ownership would be unchanged, with lower stamp duty, and the land rent replacing some mortgage interest payments.

“The existing solutions provided by the government seem to solve one problem and create another,” Eric said.

The land and the buildings provide a mix of income and capital gains exposure. The secure investor would thus value the annuity more than an occupier who seeks the rental and capital gains components.

Such an arrangement is already occurring, but without a focus on retirement incomes, Eric told the summit.

In New South Wales, the state government leases Darling Harbour and has sold annuities off the lease, including collecting $192 million from British insurer Rothesay. The Catholic Church, which owns areas of Manly, also lets people buy long leaseholds.

Up to $260 million can be saved through reductions in rental vacancy periods, as well as $1.5 billion in home moving costs for renters who become buyers through the arrangement.

Both speakers agreed that a challenge for greater utilization of housing assets is in the communication and distribution of what are quite complex products. 

Read further Actuaries Digital coverage of the 2021 All-Actuaries Virtual Summit.

CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.