The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Tuesday, August 16, 2011

Productivity Commission recommends "Reverse-Mac"

As Stutchbury notes today, the Productivity Commission has finally cottoned on to an idea I have been championing for many years: breaking-down the indivisibility of the housing asset to enable owner-occupiers to, amongst other things, release otherwise illiquid equity in their homes. (You can read my 2003 recommendations on this subject here.) The ordinarily conservative/economic rationalist PC has done something very odd indeed: they evidently believe that the nation's housing equity-release needs are so great that the Government should set up its own business, Australian Seniors Gateway Agency, to fund and deliver 'reverse mortgages' with an interest rate set at just the inflation rate.

The PC recommendations are a little odd insofar as there is already a nascent reverse mortgage industry in Australia pioneered by CBA and St George. The PC's new Reverse-Mac (as opposed to 'Aussie Mac') would offer lines of credit at way-below market interest rates, and thus put the entire private reverse mortgage industry out of business.

A far better and less costly approach would be to subsidise the existing private lenders to offer these products, which could, on my estimates, liberate up to $100 billion worth of private funding for the health and welfare needs of aged retirees (retirees as % of population (14%) multiplied by housing stock ($3.6 trillion) multiplied by say 20% to control for home ownership rates and the maximum reverse mortgage LVR).

Another question is why pick winners with a reverse mortgage, which, as the PC notes, can result in the retiree ending up with 0% equity in their home (as the debt balloons). Capital-protected shared equity loans that guarantee the retiree the same equity release sum as a reverse mortgage, but with the crucial benefit of a much higher minimum equity position in the worst case, hold out hope of being a better solution for both customers and the government (given they would likely offer taxpayers inflation-plus returns, depending on the design).

As it happens, Bendigo & Adelaide Bank have a very, very successful shared equity program targeted at retirees, called Homesafe (nothing to do with Rismark), which is a good illustration of a safer product than your standard reverse mortgage. I was disappointed by the fact that I could not find a single reference to HomeSafe in the PC report (I may have missed it).