June 2009

If I/we purchase another residence and rent out our current dwelling, would that reduce her pension?

Our panel of experts answers property investment questions from API readers. For more Q&As, see this month’s API magazine.

Impact on pension

Q My mother lives with me and her name is on the title. If I/we purchase another residence and rent out our current dwelling, would that reduce her pension? The current property is valued at $255,000 and its possible rental income is $250 per week. The new property would be valued at $335,000.

A If your mother rents out her principal place of residence, it will be included in her asset and income test when calculating her pension.

A single person who doesn't own the home they reside in is entitled to a full pension if the value of their assets is less than $296,250 and their income is less than $138 per fortnight. Above these levels a part pension will be paid up to a maximum asset value of $680,250 and income of $1577.50. Anyone who has assets or income that exceeds these levels will not be entitled to any pension.

Therefore, the amount of pension your mother will be entitled to will be determined by the total value of your mother's assets and income. I suggest you speak to a financial planner who can fully assess your mother's financial position. Mark Armstrong

Prices and rates

Q Some economists are predicting a large drop in the value of residential housing in 12 to 24 months' time as a result of the current house price inflation bubble bursting. If an event like this happened to eventuate, how would a substantial reduction in housing value affect the cost of borrowing, (i.e. fluctuations in interest rates etc.)?

A The value of property itself will have no direct impact on borrowing costs such as interest rates.

Interest rates are determined by broader economic indicators - mainly inflation. When interest rates are high this is usually a sign of high inflation. Conversely when interest rates are low, inflation is low.

If house prices are to fall this will be because the level of supply of property is more than the demand for property and this will put downward pressure on prices.

Given that we currently have an undersupply of property in Australia I don't believe it will be an excess of supply that will cause property values to fall. If prices are to fall, it will be because demand softens.

There is a significant chance that demand for houses in some areas may soften due to pockets of excessive unemployment, so we need to be wary of these areas. However if unemployment continues to rise as many expect, this will put downward pressure on interest rates.

Although I don't believe housing prices will fall across the board in Australia, if they were to fall significantly the likely result on interest rates is they will also fall. The further interest rates fall the more affordable property will become. Mark Armstrong

For more Q&As, see API magazine.

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