SO often you hear that older people are asset-rich but income-poor. What this means is that they own and occupy a house which is worth a lot of money.
The only way to free up that money and use it to live on is to take out a reverse mortgage. This can be a commercial mortgage or the federal Government’s Home Equity Release Scheme.
The problem is (or can be) that this will only ever give you access to a maximum of 25 per cent of the value of your home. The rest is effectively set aside to pay compound interest.
You could just sell your home, but where would you then live? Renting isn’t an option really. Rents go up and down. You might be outbid and not find anything decent. But most importantly of all, there are no secure leases. You might be evicted a lot and have to move all the time.
Fortunately, there are increasing signs things might be changing for the better.
The change is called Built-to-Rent housing, and it is new to Australia.
What is built-to-rent?
Built-to-rent housing is when a developer builds an apartment block, but instead of selling off the units individually, the developer keeps the property to rent out all the apartments on secure leases.
And yes, built-to-rent typically means apartments.
This type of housing is common in the UK and other European countries, as well as in the US and Canada.
Why can built-to-rent be useful for older people?
In those countries it is not uncommon to find older people living in built-to-rent housing. They have owned their own home for most of their adult life. Then they sold up and banked the proceeds.
Obviously, if you do something like this, you need to make sure you have enough to see you through until you pass.
The advantages are equally obvious.
All of sudden, you have plenty of money in the bank. Depending on your financial circumstances, you can now supplement your income and afford to buy groceries that were too expensive before. You can now do things you want to do but couldn’t afford.
On the downside, depending on what you got for your house, your Age Pension payment may be reduced. However, as you use your savings, your Age Payment will increase again.
What is happening with built-to-rent in Australia?
An Ernst & Young report released this month claims that 150,000 built-to-rent apartments could come onto the market in the next ten years.
But the report says changes are needed in how built-to-rent schemes are taxed in Australia.
Built-to-rent schemes are currently favoured by overseas investors, who know they work and are a good investment.
So typically, built-to-rent schemes attract a 30 per cent withholding tax on profits. Profits on commercial buildings, such as office towers are taxed at 15 per cent.
The Ernst & Young report says that the withholding tax on built-to-rent profits should also be 15 per cent. Then, an average of 15,000 apartments a year over the next ten years would be possible.
Without this tax break, it is estimated that between now and 2026 there will only be 3,000 or so built-to-rent apartment completions in Australia.
In its unsuccessful election campaign for the 2019 federal election, the Australian Labor Party committed to halving the withholding tax rate for built-to-rent schemes to 15 per cent.
However, a 2022 Productivity Commission rejected the idea, saying governments should not try to tip the scales in favour of institutional investment.
While most agree built-to-rent schemes could play a major role in easing housing supply pressures in Australia, some are not so sure.
Speaking to the ABC, Sydney University economist Dr Cameron Murray is not convinced that built-to-rent tax breaks would benefit the average Aussie.
“Existing built-to-rent projects are predominantly high-end luxury apartments, and the owners of them report to investors how successful they are at charging more than the local market rent by bundling in premium features like fancy gyms, food services. Is this something that we should be providing subsidies to?”, Dr Murray said.
The Australian Housing and Urban Research Institute’s Professor Hal Pawson told the Australian Financial Review that built-to-rent is “sometimes oversold”.
“Claiming that it’s going to solve the affordable housing problem that everybody knows Australia has, is hype.”
“Built-to-rent units are typically targeted towards moderate- to high-income households and rented out at market rates, so it doesn’t directly contribute to the supply of affordable housing,” Professor Pawson said.
Is built-to-rent good for older people?
Given that the Australian built-to-rent market is geared towards wealthier people, it may not be an option for people who want to free up the equity in their home to improve their standard of living.
However, the bigger built-to-rent becomes it may extend into the affordable housing market in the future.
In that case, built-to-rent could become a common way of accessing housing wealth to improve retirement living standards.