Housing is the single most valuable asset
owned by the
majority of Australian households
“Housing is the most important asset owned by the majority of Australian households. It is a large component of household wealth and serves a unique, dual role as an investment vehicle and a durable good from which consumption services are derived. With most mortgages and many small business loans secured against residential dwellings in Australia, housing also forms an important part of the collateral backing the financial sector’s balance sheet.”
RBA Long-run Trends in Housing Prices Oct 15
The critical fact to remember is that there is no one, single, ‘Australian Property Market’ – different states, suburbs and housing types travel at different speeds depending on the prevailing economic conditions, demographic changes, income levels, supply constraints, and government incentives to name just a few influences.
Currently, the depth of the market and volatility risks impacting the housing market as a result of the COVID-19 pandemic is yet to be fully realised or quantified. So far, prices have been resilient. Not all, but two of the worst impacted sectors, hospitality and retail, have workers and students who would have a direct and sudden effect on rental demand leading to an oversupply and downward pressure on achievable rents. Vacancy rates in both inner-city Sydney and Melbourne have increased, and it’s thought to be because students with casual hospitality jobs have been forced to exit the market.
The financial and legislative support put in place by the Federal and State Governments are not only welfare measures for those most vulnerable but also designed to limit harm to the property market.
The Reserve Bank provides Snapshots of key economic indicators, and it’s worth noting that despite the expectations of negative economic growth, volatility in financial markets and flagging business incomes, housing is to date, holding up better than expected. Australians are typically faithful payers of debt and our banks, for the most part, take their fiduciary responsibilities seriously, and so their credit assessments are conservative and responsible. Consequently, non-performing loans are still low at 1% but being realistic and uncertain as to how long the restrictions will stay in place, there is the expectation that they may rise.
Overall, housing risks are rated low, with only 3% in negative equity, a situation where the property is worth less than the outstanding debt.
Social distancing rules have changed the outlook for commercial property. With any significant upheaval to conduct and expectations, the eventual return to normal will come with some lasting consequences. The workforce has been forced to learn and adapt quickly and to become ‘digitalised’. Change is stressful, no doubt, but there will also be measurable efficiency and productivity gains. (greater flexibility and adaptability in the labour market is a supply-side generator of productivity gains and reduced costs) and management will be reassessing their need for expensive office space. It’s also hard to imagine that their successful and resilient work patterns haven’t bolstered the bargaining power of employees seeking flexible work arrangements over the last few months.
The diverse impacts, varying in degree, is again a reminder that the concept of a single property market is a misrepresentation and an oversimplification of a mechanism with many moving and complicated parts.
A compelling motivation to invest
and create wealth
is to provide a financially secure
and independent retirement.
The best way to predict the future
is to create it
If you want to have future choices, you need to understand the conditions you will most likely face in retirement and make some informed decisions now.
Consider the following:
(a). Welfare dependence – Australia provides a welfare safety net for those unable to provide for themselves in the form of pensions and other income support measures.
Currently, social security and welfare absorb approximately 35% of the budget or around $192 Billion in 2019-20. (www.aph.gov.au)
The Age Pension is available for those who are no longer working and over the age of 65.5 – 67 years and meet residency and asset test limits.
As at 29 June 2018, 2.6 million people aged 65 and over received income support payments, equating to 2 in 3 (67%) of the population aged 65 and over. Of these, 95% (2.5 million) received the Age Pension
Post-retirement, nearly two-thirds of Australians receive government assistance as their main source of income (ASIC 2018), to meet everyday costs of living. (https://www.aihw.gov.au )
Given the accelerating size of the retiree cohort, (the ‘baby boomer tsunami’) a substantial proportion of whom are reliant on government support plus the fact that 35% of the budget is already devoted to social services, it is clear that welfare dependence is unsustainable.
Assuming a baseline of outright homeownership and relatively good health, the Association of Superannuation Funds Australia provides an annual estimate of what income per year as a minimum is required to fund either a “Modest” or a “Comfortable” lifestyle in retirement. (www.superannuation.asn.au)
|Basic Requirement||Modest Lifestyle||Comfortable Lifestyle|
|Total income per year||$27,648||$39,775||$43,317||$60,977|
Now consider the level of income the Age Pension provides, and the predicament of welfare-dependent retirees becomes more self-evident:
|Aged Pension||Modest Lifestyle||Comfortable Lifestyle|
|Total income per year||$24,081||$36,301||N/A||N/A|
A ‘modest’ lifestyle is basic, and while a ‘comfortable’ one sounds more attractive; it is certainly not extravagant. It just means that it’s likely a couple can have a reasonable car, possibly private health insurance and an occasional overseas holiday.
(b). Australia’s Ageing Population
Welfare spending already absorbs 35% of public funds and will continue to grow because our population is rapidly ageing.
In 2017, 1 in 7 Australians were aged 65 or over. It’s estimated that over the next 40 years the proportion of the population over 65 years will double to approximately 25%. Additionally, because fertility rates are falling (average number of babies born) potential workforce participants and consequently, the taxpayers to support the elderly, are diminishing. Every workforce ends up supporting the generation before them, and so the burden on the future workforce is likely to be tough and unsustainable.
There will be fewer working-age population to support the growing group of senior citizens, and their level of support and services is likely to be compromised:
“In 2002 there were more than five people of working age to support every person aged over 65. By 2042, there will only be 2.5 people of working age sustaining each person aged over 65.” (demographics.treasury.gov.au)
Combined with a falling birth rate (3.1 babies per woman in 1921 to 1.8 babies in 2016) and the shrinking workforce, the pressure on the public purse will increase.
The logical conclusion is that individuals
will be under pressure to
fully fund their retirement
or at the very least accept a reduced level of support.
“The effects of ageing will be felt more over the coming decade than in the past due to the impact of the baby boomer generation retiring. This change has already begun to detract from economic growth, after decades of providing a boost to growth…Ageing will reduce tax revenue and add to spending pressures…”
AUSTRALIA’S AGEING POPULATION Understanding the fiscal impacts over the next decade Parliamentary Budget Office 2/19
(c). Life Expectancy is increasing
The current life expectancy for Australia in 2021 is 83.64 years, a 0.18% increase from 2020.
Before the introduction of the Age Pension (originally called the ‘Old-Age Pension’ ) the old and infirm had no financial support whatsoever. They were reliant on their families, churches or charities or government asylums!
In 1909 a Commonwealth funded, means-tested, non-contributory (funded by current worker’s tax) was introduced and paid to men from the age of 65 (women at 60 from 1910) when life expectancy for a man was 55 years!
Renamed in 1947, the Age Pension wasn’t intended to be a widespread or a long-term solution.
“The social effects of improved life expectancy at older ages include an increase in the aged population and the associated issues of income support for the aged and their need for health resources. However, the impact on the individual receives little attention…. the Third Age… refers to the lengthy period of active life following retirement and points out that it is a distinct and significant phase in most people’s lives…….an era of personal fulfilment.
Laslett, P. (1989) A Fresh Map of Life: The Emergence of the Third Age Weidenfeld and Nicolson, London.
Report of the House of Representatives Standing Committee for Long Term Strategies (1992) Expectation of Life: Increasing the Options for the 21st Century AGPS.
Retirement now means living for another 20, possibly 30 years as technology and health management advances. The health of the aged is also improving generally, and expectations in later life are very different in 2020 to what they were decades ago.
“The concept of ‘working age’ is slowly changing and through better health and greater longevity, mature-aged Australians continue to contribute socially, culturally and economically to the broader community. All political parties now recognise the importance of encouraging ongoing workforce participation and increasing retirement earnings and assets.”
Findings from the Work, Care, Health & Retirement: “Ageing Agendas” Project 2017
Consider too that life expectancy is increasing at an increasing rate. We can predict that a child born today will live well into their 80’s on average. Given the pace of improvements in medical knowledge and technology, these figures are likely to extend beyond the ’80s and into the ’90s within a decade or two!
(d). Compulsory Superannuation
Recognising the emerging need to reduce the burden of age-related welfare, in the late ’80s, the Federal Government formulated a retirement income policy identifying superannuation as a way of both boosting national savings and self-funded retirement incomes.
In return for the condition that a person’s super stay untouched or ‘preserved’ a concessional tax environment is provided as an incentive.
The Compulsory Superannuation Guarantee was introduced in 1992. Employers are compelled to pay an additional 9.5 % of wages into an employee’s complying fund. The Super Guarantee is legislated to rise to 12% of wages between 2021 and July 2025.
As at the end of 2019, superannuation assets in Australia totalled $2.9 trillion. (www.apra.gov.au)
Compulsory Superannuation is one of the four pillars of the retirement income system (along with the Age Pension, private savings and homeownership) and it aims to help maintain living standards across our lifetime – i.e.’ lifetime consumption smoothing’.
“People tend to focus too much on the short term, leading many to save less for their retirement than is needed if they want to consume at about the same rate across their lifetime”
Financial System Inquiry  Financial System Inquiry, Final Report
“Average superannuation balances at the time of retirement (assumed to be age 60 to 64) in 2015-16 were $270,710 for men and $157,050 for women.
Given that the system is still maturing in terms of reaching the proposed long term rate of contributions and many Australians have received compulsory contributions for not much more than 20 years, the majority of adult Australians still have relatively modest levels of superannuation. It will be another 30 years or more before most individuals will have the full benefit of a mature SG system.”
October 2017 Ross Clare, Director of Research ASFA Research and Resource Centre
The Old Aged Pension was introduced in 1909 and was accessed by a tiny percentage of the population as the qualification age was 65, and male life expectancy was only 55!
Currently, 2.4million recipients receive the Age Pension or part thereof.
The current Age Pension for a couple combined is $36,301 per annum or $1396 per fortnight.
Almost half of the retirees depend to some degree on Government welfare.
The Age Pension affords a couple a ‘Basic Lifestyle’ (assuming you own your own home outright and are in comparatively good health)
Our population is ageing. By 2060 it is estimated that 25% of us or 1 in 4 people will be over 65 and there will be only 2.5 people of working age for each 65+ individual. There will not be enough taxpayers to keep the pension at current levels.
A “Comfortable Lifestyle’ requires a minimum of $61K for a couple.
The qualifying age to receive Government Age Pension benefits is rising to 70 for those born after 1965 by 2035
We are living longer – life expectancy for males born now is 80.4 years, and for females, it is 84.6 years. Retirement income needs to last longer than ever before.
Women’s superannuation balances are on average significantly less than for males.
Abundance isn’t finite, there are opportunities for average Australians to create wealth, but you need to know about them and be prepared to act on them!
It comes down to knowledge and attitude.
A special note on the current events besetting Australia and the global community. Exogenous shocks, of the magnitude and global pervasiveness of the COVID 19 pandemic are unprecedented and present enormous challenges. One of the first litmus tests of such confidence eroding events is stock market performance. Share prices around the world have plummeted, some in free fall. Superannuation dependent retirees have lost significant amounts of money as a result. The ‘wealth effect’ for retirees and even younger investors and households is substantial.
It would be naive to suggest there will be no effect on property prices. Property is, however, one of the basics in life.
Demand for housing will continue, albeit possibly at lower prices until the bounce-back happens when the virus comes under control as it no doubt will, eventually. There will be pent up demand, and the usual demand and supply factors will resume their respective influences.
Property is also a relatively illiquid asset. Property owners cannot come in and out of the market by submitting a ‘buy’ or ‘sell’ order with the click of a button! To every perceived downside, there’s an upside, and this one should help keep a floor under prices.
Everything passes, this will too. Panic is not a strategy; it’s the biggest mistake investors make.