Older renters struggle while younger Australians get a mortgage boost
It is rare that a bit of really bad news is quickly followed by a bit of good news that in the long term will help to alleviate the problem that has been identified.
The problem in this case is the growing plight of retired renters on low incomes, some of whom face a very bleak future.
The reason is the structure of the age pension which is effectively designed to maintain the livelihood of older people who own their own home.
It does a reasonably good job at achieving that but an alarming report from the Grattan Institute painted a particularly bleak picture for age pensioners who rent.
Most pensioner renters close to homelessness
It found that most retirees who rent and rely on the age pension live in poverty, including more than three in four single women, and predicted this problem is set to get worse.
The report found the Age Pension provided an adequate, modest income in retirement for those who own their own home, many retirees who rent are really struggling to get by.
While 78% of over sixty-fives own their own home, the report found the Commonwealth Rent Assistance, which supplements the Age Pension for poorer retirees who rent, is inadequate.
After paying for essential non-housing costs, a single age pensioner receiving the full rate of Rent Assistance has only $300 a week left for rent – yet a cheap one-bedroom home in an Australian capital city costs around $350 per week.
As a result, few retirees who rent can cover housing costs and still afford other essentials.
Even though rent assistance has been increased by 27% over the past two Budgets, well above the rate of inflation, the report said it remained “inadequate” given rapid rent rises and predicted a rash of homelessness unless the payment was boosted.
So far, so bleak, with the enduring message being that everybody should plan to own their own home by the time they retire – after all, relying on increases to Government assistance is hardly a financial plan.
Big student loans will not stop home ownership
The rare bit of good news is that Australians with student even massive HELP debts will finally be able to borrow more for a home and get easier access to a mortgage under changes to lending rules imposed on the nation’s banks.
This is likely a result of the Federal Government trying to grab votes among young people but it does address what has become a serious issue as banks became increasingly reluctant to lend money to heavily indebted students.
Home ownership rates among young people have fallen to their lowest levels since World War II on the back of high interest rates, an explosion in house prices and growing HELP debts.
The $43 billion debt overhang
Around three million Australians have outstanding HELP loans which add up to a hefty $43 billion, although the government has also promised to slice HELP debts by 20% from June this year.
Of course, that is after the election so a change of Government could see this promise wither on the vine.
Treasurer Jim Chalmers has met with the CEOs of the big banks to discuss the problem and has written to both the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission to vary lending standards and how they affect people with HELP debts.
Under current APRA regulations, a bank needs to ensure that a potential first-time borrower for a loan can tolerate a 3% increase to their mortgage interest rate.
Under the proposed changes, banks will be able to exclude HELP repayments from the serviceability assessment for a loan where the borrower is expected to pay off their debt in the near term.
Exactly what is meant by “near term” will be discussed between the banks and APRA but the change should allow lenders to make their own judgments based on the individual circumstances of customers.
Debt to income ratios improved
APRA is also dropping the requirement that HELP debts are included in the debt-to-income ratio for a potential mortgage, which will also help borrowers to get a loan.
Debt-to-income ratios of above six, in which a person is borrowing more than six times their annual income, are considered risky and generally restricted.
By excluding HELP debt from overall debt, home buyers will be able to borrow more.
The changes also make some logical sense because graduates are likely to have a larger income in the longer term and be able to service loans more easily.
Developer lending rules relaxed
Another part of the change to stimulate home building will see APRA overhaul advice to banks on how they loan cash to the developers of apartment blocks.
Since 2017, some banks have interpreted the APRA advice to provide loans to developers only where they have sold all units before a project starts construction.
Many smaller builders claim this prevents them starting work even when they have a high percentage of pre-sales.
The change will mean not all units will need to be sold before building starts, although the level of pre-sales will obviously still be considered.
No magic wand
Of course, all of these changes are not some magic wand that will instantly fix the issue of older renters but in the long term these changes should benefit many people.
It could be argued that many of the older renters I will be dead by the time these changes take effect and that is a fair point.
However, some progress is better than nothing and young people with large HELP debts will at least be one small step closer to pursuing their dream of home ownership.
Even then, they will need to be careful given that all debt comes with risk but the important lesson for everybody to learn is the importance of home ownership before retirement.