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During a panel at a retirement income forum hosted by reverse mortgage provider Household Capital on Thursday, speakers reflected on the potential economic boost from releasing housing equity into the economy.
Reflecting on the reverse mortgage market, Deloitte actuary and partner James Hickey estimated lenders would release around 25 to 30 per cent of a home’s equity.
Based on an estimated $1 trillion tied up in Australian retiree’s property portfolios, around $300 billion could be potentially released via reverse mortgages, he calculated.
“We estimate that the current outstanding reverse mortgage market of commercial providers and excluding the pension loan scheme is only around $3.6 billion,” Mr Hickey said.
“We consider at the moment at the market has really only penetrated around 1 to maybe even up to 1.5 per cent of the potential addressable market that we just discussed.
“So, certainly even if it went up to the area where the UK and the US are around 5 per cent or more of the retirees using the product, then you could see a three to fivefold increase in with the current market sizes of $3.5 billion well up to a $10-$15 billion, if it got to the same level of uptake amongst retirees.”
Further, around half of Australian household wealth (55 per cent) is held in the housing asset, Mr Hickey stated, noting it would be skewed towards older demographics, who would probably be the prime beneficiaries of a reverse mortgage.
But, the $1 trillion estimate of equity for retirees may be conservative, CoreLogic research director Tim Lawless speculated – noting the overall asset value of housing broke the $8 trillion mark in early April.
“Almost without a doubt, by the end of September, we’ll have an asset class that’s worth about $9 trillion,” Mr Lawless said.
At the same time, wages have risen by around 1.7 per cent per annum, compared to a rise in the value of housing by almost 19 per cent in the past year, he added.
“We’re seeing housing prices rising more than 11 times faster than wages, which means more and more younger people simply can’t get their foot in the door of the housing market by either raising a deposit or funding their transactional costs,” Mr Lawless said.
“So probably the two key aspects are if you are starting to see more capital coming into the economy, two really good examples of how it could be used would be helping younger people get into the marketplace because they’re really struggling to do so, even with a lot of incentives from the government. And secondly, obviously there’s a consumption benefit as well, with more spending.”
Supply and distribution challenges
The traditional mortgage market, which has close to $2 trillion of outstanding credit, far outsizes the potential $340 billion on offer through reverse mortgages.
Even if there was a 10 per cent penetration rate in reverse mortgages and lenders accessed $30 billion worth, Mr Hickey explained that would still be a “relatively small sum” for the major banks.
“So it’s always been difficult for our major banks to want to offer the product in a sustained way, and promote the awareness of the product and promote education and support the consumer use cases of the product,” he said.
“So, that’s led to largely non-bank lenders, or niche lenders being the ones who have to really carry the heavy lifting on offering the product, both from a product design and a funding perspective, but also importantly on the marketing, the educational awareness, the financial literacy of the benefits that reverse mortgages.”
Mr Hickey also called the low popularity of reverse mortgages in Australia a “story over two decades now of supply side issues”.
“I think a lot of people recognise the demand side opportunity is largely there. But at the moment, people really aren’t informed about the product, how it exists alongside the age pension and the superannuation system,” he said.
“And therefore, without that awareness, then it’s not really being taken up by consumers.”
Reverse mortgages are a credit product and therefore need to be issued by a licensed credit representative. Consumers either need to attain the product directly through a lender or a mortgage broker.
However, Mr Hickey said, while consumers have low awareness around the product, brokers will generally target first home buyers, investors or the refinancing end of the market.
“They’re not often advising retirees on other credit matters. So it does take a particular mortgage broker to want to actually understand the product and to deal with the complexity involved in having such discussions with retirees, which then means then you think about the obvious distribution channel, which would be financial planners,” he said.
Financial planners, who largely focus their careers on the pre-retirement phase for consumers and give advice around retirement income, could be a potential way in, he suggested. They could also potentially benefit from shifting their retirement income strategies.
“The challenge has always been to gain awareness of financial planners about the role of the product,” Mr Hickey commented.
Bob Officer, University of Melbourne professor and chair of investment firm Acorn Capital commented accessing home equity as a retiree makes sense for those who are “capital rich and income poor”.
“There’s a lot of people of my age group, quite frankly, who are sitting on quite a lot of capital and they’re unable to, or unsure of how they can access that capital for consumption,” Mr Officer said.
But he echoed Mr Hickey’s comments around a need to educate advisers on the product, saying “not many of them understand it”.
[Related: Former APRA member to join Heartland board]
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