The indifference of housing the olds (the latest in Aged Care debate)

Partially because of all of the media coverage regarding Aveo, and partially to satisfy my Office Manager, so she will stop clogging up my inbox with articles, I have decided to weigh in on the current debate surrounding Aged Care. After all, how could I possibly resist this soapbox moment?

Now, firstly, I have the greatest respect for the Elderly. My motivation to become an Aged Care specialist goes back to the start of my career where I observed a shocking amount of apathy, and sometimes downright abuse, towards this incredibly vulnerable group of people. Never one to let an injustice go by, I developed a close working relationship with the Office of Public Guardian, and reported many breaches made by Power of Attorneys, much to the dismay of my then manager.

Right now, everyone is in up in arms over the Deferred Management Fee model that was used by Aveo. The lawyers have an opinion, the politicians have an opinion, the share holders have an opinion, and the media is pointing the spotlight. It seems that everyone has an opinion, and is happy to point their finger, but why now? After all, Aveo has been around for 25 years, and there are many other providers out there using the same fee model.

Personally, I believe that this is a result of not just people living longer, but also being more able for longer. When these residents need to step up their care and move, they realise exactly what a deferred model means. Previously, this would have been masked by natural attrition. The provider would have claimed the deferred fee from the Estate rather than trying to claim it from a person, which is much more difficult.

Here's the million dollar question though. Why did the resident sign the agreement in the first place? The lawyers would say that the contracts are complex and draconian. One would generally suppose that if a middling person did not follow the words on the page then they wouldn't have signed without further advice. The politicians would probably say that it was shoddy business practices, that whole over promising, under delivering thing that happens. Once again, this indicates to me that the resident has been left to their own devices to make their decision. The shareholders would claim that the fee model is to blame, but of course, it worked well over the last 25 years, so why would you throw the baby out with the bathwater? Oh that's right, because now somebody actually cares, and got the media involved.

Elderly people are in a period of cognitive decline. There is no escaping this fact. And yet, we, as a society, have expected them to read a complex contract, and make an informed decision with information provided to them by the seller. That is akin to taking the word of a Real Estate agent that you don't need to get a valuation or pest inspection...it's all good...just sign here. No one in their right mind would do that!

So, rather than pointing the finger at a legal (which is not the same as moral, or ethical) business model, perhaps we should take the time to reflect on where the support network for the residents was when they signed that complex bit of paper. As a society, we need to hold up that mirror and admit that we have failed to protect those needing protecting.

We can change the legislation, and increase the regulation of this industry, but at the end of the day, a caring, and close, support network is what will protect the elderly. As individuals, we need to acknowledge that our parents, and grandparents, are growing increasingly frail, so don't put your head in the sand; ask them if they need help and be involved in their lives. And for goodness sake, if you don't understand it, get advice!

Find Erin* at Achieveit Financial Planning, or call for an appointment on 07 4638 5011.

*Authorised Representative of Securitor Financial Group Ltd ABN 48 009 189 495 AFSL 240687

This is general information only and does not consider your personal circumstances. You should not act on any recommendation without obtaining professional advice specific to your circumstances. We recommend you speak to a financial adviser before acting on any of the information you read on this website.

House of cards (no, not the show)

Imagine this...you are at a BBQ at a mate's place. You are sitting in your camping chair sipping your sav blanc from your plastic glass (or standing around the BBQ, drinking a cold tinnie in a semi-witty, slightly obscene stubbie cooler, if you're a bloke). The kids are splashing around in the pool, with the occasional growl from the token responsible adult, and the scent of insect repellent is heavy in the air. The conversation started out light, with everyone being friendly over the cob loaf dip (which is divine by the way...look it up if you've never had it), but as the esky starts to empty, the conversation becomes a bit more predictable.

In much the same way that Financial Planners are guaranteed to ask each other "How's business?" at conference (answer: "busy...so, so busy. You?"), there is that individual that attends BBQs and redirects the conversation to investing. Once tall poppy has the undivided attention of the group, he starts (or perhaps a she?) to pat himself on the back about how clever he is to have built himself a multi-million dollar property portfolio. Then he unloads the kicker...he pays no tax! "No tax?!?" you ask in wonderment..."but how?"

Welcome to the world of the heavily negatively geared. Negative gearing is where you pay out more in tax deductible interest and expenses on an asset than you earn in income. Once the calling card of property investing spruikers, it is becoming increasingly dangerous territory. It has been flagged by both sides of Government as an issue, and coupled with Capital Gains Tax discounts, has not been helping housing affordability, or the Government coffers. This can all be overlooked when the share market is booming, Government debt is low, and upward social mobility is strong...like in 2008. Fast forward through the GFC, higher Government debt, and a housing crisis, and all of a sudden, there is a problem.

The real problem is that there are many Mums and Dads out there that have been sucked into the vortex of negative gearing through the conversation with either tall poppy's at BBQs, or property spruikers, that should not be in this space. They are on either average, or sometimes below average, incomes. They live off their credit cards because all of their cash flow is taken up by paying interest on their interest only loans, and then pay out their credit card when they receive their bumper tax return. This means that the Government cannot change it's negative gearing policy without having significant impact on the many of these "House of Cards" empires around Australia, which will not make for happy opinion polls or focus groups.

What has happened is that APRA (the Australian Prudential Regulation Authority) has changed it's stance on investment lending. APRA now requires the banks to limit their interest only lending to 30% of all of their lending. They also require that the banks "manage" lending to investors so they remain below a previously advised benchmark of 10% growth.

What does this mean? At a base level, the banks are now limited to how much lending they can have on their books for investment lending, so they only want the cream of the crop. To get this they have increased their Loan to Value Ratio (LVR), in one case to 50%, which will mean that new entrants will need a deposit of 50% to purchase an investment property.

The real concern is that in order to maximise their 10% growth, the Banks will also need to shift some of their interest only book to principal and interest. This will free up their 30% limit to attract new business. Transitioning the current lending book from interest only to principal and interest will force those with a House of Cards to either sell their properties as their repayments become more onerous, or increase the rent, which is a risky strategy at the best of times.

So, if you are unsure of how all of these changes will impact your property empire, please pick up the phone and check with your lender. And if you didn't like their answer, then make an appointment with a financial planner (cough, cough) so that you can plan your exit strategy, and how to continue building your wealth, before you are forced to fire sale with all the other Mums and Dads out there.

Further information regarding the APRA changes can be found here.

Find Erin* at Achieveit Financial Planning, or call for an appointment on 07 4638 5011.

*Authorised Representative of Securitor Financial Group Ltd ABN 48 009 189 495 AFSL 240687

This is general information only and does not consider your personal circumstances. You should not act on any recommendation without obtaining professional advice specific to your circumstances. We recommend you speak to a financial adviser before acting on any of the information you read on this website.