Aged care sector faces $650m funding gap, despite $5b a year in village sales

New Zealand's aged residential care sector faces a widening funding gap of approximately $650 million, according to a report by Westpac. Despite receiving $5 billion annually from village sales, the funding gap has increased from $170 million in 2014 to $650 million in 2025, according to industry economist Paul Clark. The report examines the challenges faced by service providers in addressing the sector's issues.

As more people enter care facilities at an older age with more complex needs, the sector continues to struggle with funding. Aged residential care is jointly funded by the government and residents, with various add-ons and top-ups for additional care requirements. While funding has increased steadily, it has not kept pace with rising costs due to workforce shortages.

The $2.7 billion sector-wide deficit has grown by about 290% since 2014 as funding growth has diverged from the increasing cost of delivering care. Hospital-level care accounted for the largest share of spending at $1.5 billion, followed by $1.1 billion for rest home care and $600 million for dementia care.

Labour costs comprise the largest expense for the sector. Providers are exploring ways to improve operational efficiency to reduce costs. Retirement villages, which are more profitable than rest homes, generate around $5 billion annually from the sale of occupation rights agreements. These agreements involve the purchase of units or apartments for general living purposes.

The report identifies two primary business models: standalone care facilities and those offering a continuum of care through retirement villages. Standalone facilities face greater funding challenges, while those combining residential and care services benefit from property income to offset losses. However, this approach may result in less investment in standalone care facilities, as they are not as profitable as standalone operations.