No family house? No inheritance? Potential impacts from the rising cost of residential aged care

Housing affordability impacting young people is headline news – but what about the other end of life’s journey?

Our twilight years may consist of: being forced to sell the family home; living apart from our spouse; erosion of inheritance wealth; and compromising on our anticipated quality of life when entering an aged care facility.

The cost of aged care is rapidly increasing. Advances in health mean we live longer – the average Australian is now expected to live till 80 (male) and 85 (female), and the numbers of pensioners will soar by 2055[1].

Over the same period, the number of working taxpayers to each elderly person will decrease from 4.5 to 2.7[2], placing significant pressure on the Australian workforce and the government, to support our ageing population. Aged care expenditure is expected to increase from 0.9 percent of GDP in 2014/15 to 1.7 percent of GDP by 2054/55.

The cost of residential aged care is also increased by residents being older, frailer and having more complex care conditions, with an increased prevalence of dementia.

Around 76,000 new aged care places will be required over the next decade, with estimated sector capital investment of $33 billion[3].

While the commonwealth regulates aged care places, there are variations in supply and demand between planning regions and metro and regional/remote areas, worsening supply pressures.

A large proportion of existing facilities are losing relevance. The average age of facilities in Australia is over 20 years with many originally designed for ‘low care’ purposes. These facilities will not be able to accommodate residents with complex care needs.

Consumer preferences are also changing rapidly. What was accepted by previous generations, such as multi-bed rooms and institutional styled facilities, are no longer tolerated.

We already see a surge in the development of premium residential aged care facilities. A recent development in Vaucluse, Sydney, is demanding an entry price of $1m to $2m per aged care room.

With supply constraints, rising property prices and emerging consumer preferences, the cost to develop residential aged care facilities will increase, as will the entry price for residents.

As care costs rise inexorably, further ‘innovative’ models of accessing funds will see be required and we will see a major shift towards a ‘User Pays Model’. In comparison to other countries, Australia is still treading softly.

Residential care makes up 82 percent of the $20bn cost of aged care services. Consumer contributions represent 26 percent. In the UK, the figure is 45 percent.

More stringent means-testing rules will be applied. With most consumer wealth held in the family home – around $6tn – this asset class will be a major target.

The desire to own one’s home is ingrained into the psyche of most Australians. We have high levels of home ownership and a strongly held belief in preserving this capital for future generations. ‘Drawing down’ this equity for other purposes is alien to us.

But the average Generation Y has not benefited from the property boom and will be much less tolerant in allowing older generations to retain their ‘million dollar’ plus residences, whilst receiving support from the government.

Currently for residential care the family home is either exempt or capped at $159,631 for means testing purposes. With the average home price in Australia now $623,000[4], the cap must rise.

The UK and New Zealand include the full value of the family home when determining a resident’s ability to pay for care costs. Both have, or plan, a deferred payment scheme. Instead of forcing people to sell their homes, payments are deferred until equity is accessed, but the expectation to pay for care costs remains.

Australia also has a cap on the cost of residential aged care paid by an individual, being $26,041 per annum, and $62,498 per lifetime. This too will change.

As we move towards a User Pays Model, some will have to sell the family home to access capital. The expectation of children to claim the family home may be nearing extinction for the middle classes.

We also expect an increase in the popularity of reverse mortgages and other equity release products.

Spouses and families will have to face the prospect of increased debt levels and depleting wealth. The notion of achieving a debt free position in one’s later years may only be short lived and our current expectations of intergenerational wealth will be challenged.

The transition into residential care is a challenging and emotional decision to all involved. It will become harder as governments seek to trim budgetary pressures.

Government and industry need to come together now to find sustainable long terms options for the sector, whilst ensuring that we protect the vulnerable and aged and consider the impact to families and the wider community.

Otherwise the Great Australian Dream of home ownership looks like having a nasty sting in the tail.

Read the full report, No family house, no inheritance

This article first appeared in The Australian.

[1] Life Tables, 2013-2015, Australian Bureau of Statistics
[2] 2015 Intergenerational Report, Commonwealth Government
[3] Fourth report on the Funding and Financing of the Aged Care Sector, 2016, Aged Care Financing Authority
[4] Residential Property Price Indexes, June 2016, Australian Bureau of Statistics

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