Australia is slowly but surely becoming a nation of renters. Fewer and fewer people own their own home.
According to the latest available stats from the ABS, the proportion of people renting is on the rise. The proportion of people owning a home without a mortgage is going down. Only the proportion of owners with a mortgage has stayed relatively steady. This is in line with the idea that mortgages are getting more expensive, and people are taking longer to pay them off.
The problem is worse in some areas than others. For example, the chart below shows home ownership against private renting for all years on record, in New South Wales. In 30 years, it could be more normal to rent than to own your own home. Possibly shorter than that, if house price growth keeps outpacing income growth.
Data source: ABS
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It’s even worse in Victoria. In less than 20 years, private renters could outstrip owners.
Data source: ABS
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Of course, that’s a very simple model. But it highlights an important potential trend. That is, for many people of working age today, it could seem normal to live in a rented home in retirement.
If this happened, it would be a massive cultural shift. Aussies are pretty attached to the idea of home ownership. It’s all about a sense of permanence, belonging somewhere, being able to make the kinds of improvements and changes that turn a house in to a home.
In many parts of Europe, it’s different; renting is normal, and people often rent the same house for decades (as opposed to the Australian average of 6–7 years). Of course, in Europe they’ve also got tighter rent control rules, and longer standard leases. But part of it is down to attitude. In Australia, not owning your own home is seen as a bit of a failure. It’s seen as a sign that you failed to scrimp and save hard enough, or that your employment is patchy, or your profession not particularly skilled and therefore poorly paid. In Europe, they don’t seem to have the same attitude problem. For example, Germany is a pretty wealthy country. On an income (not asset) basis, German individuals and households are richer than their French, Italian and Spanish counterparts. Yet according to OECD stats, 60% of them rent.
If it’s just a matter of changing attitudes, that begs the question: why don’t many retired people today live in rental properties? It’s the perfect time. Most retired people, if they had children, don’t have children living at home any more. They can take the opportunity to downsize, and get rid of extra space (and maintenance hassles) they don’t need. They can leave behind maintenance, rates, body corporate dealings, and all those other ownership hassles, and just concentrate on rent and bills.
And they (hopefully) don’t feel the need to prove that they’re capable or worthy of home ownership anymore. They may have already owned a home, successfully, for a number of years. Plus, have you ever met an old person who cared more about how other people perceive them today than they did when they were working?
For many, there are practical and emotional reasons behind staying in their owned home.
The real reason many retirees don’t downsize
According to a recent report by think tank Per Capita, many older people feel conflicted about downsizing. They may recognise that it makes sense, but they may feel attached to homes they’ve lived in for decades. Or they may not think it’s worth the effort to move. The report, entitled The Head, the Heart and the House, said:
‘Recent analysis of the housing intentions and decisions by current cohorts aged over 65 reflects the attachment which older Australians have to home and community, and the prioritization of these factors over financial ones. National Seniors has found that the most important factor people cite as their ‘main’ reason discouraging them from downsizing was that it would take too much effort – 29% of respondents expressed this view. The financial impact of downsizing, such stamp duty and impact on the age pension, was a factor but not the main discouraging factor for most people. Research by AHURI has shown that the main obstacle people encountered when considering or undergoing the process of downsizing was housing availability and the appropriateness of the housing options available.’
So it’s not about any one thing in particular. It’s about a combination of psychological, emotional, practical, social and financial factors. And, whether it seems ‘sensible’ or not, that combination is heavily weighted towards emotion.
Personally, I think the ‘appropriateness’ thing won’t be as much of an issue in the mid-term. If you have a quick look at the AHURI research (you can download it here), a lot of the anecdotes from respondents are about things like not having to deal with stairs. But as new medium and high density buildings replace older buildings, including single-level dwellings and old apartment buildings, there will be more dwellings with appropriate mobility and access amenities. Many other fixtures within a unit, such as hand rails and personal alarm systems, are easy to retrofit.
High house price growth plus low rental price growth equals…
In most cities around Australia, house price growth is far outstripping unit growth.
On top of that, rental yields are slowing down — and in some locations, going backwards.
The longer this keeps happening, the more financially attractive it will be for retirees to downsize to rented properties.
It’s a simple theory. A couple who own all (or most) of their house could take advantage of price growth to sell their home and make a profit. They could use that money to pay rent on a nice apartment or townhouse for the rest of their lives. They might even have a bit left over to enhance their lifestyle in retirement. Because the principal home is exempt from CGT, they wouldn’t have to worry about losing money to tax. Or about paying stamp duty on a new home — because they wouldn’t be buying a new home.
Let’s look at an example in today’s prices. Keep in mind, this difference would only get better as the difference between house price growth and rent growth increases.
Just say a couple had a house in Hawthorn that they’d bought 40 years ago, and finished paying off 10–15 years ago. It’s an average three bedroom house for the area, so it costs $1.44 million (realestate.com.au data). If they want to rent a two bedroom apartment (spare bedroom so friends and family can stay) in the same area, they’ll pay $415 per week.
If they rent the same place for as long as they (are statistically likely to) live, they’ll pay about $432,000. Even if their landlord raised their rent by (a statistical average of) 2.1% (DHS) per year, they’ll still only pay around $530,000.
This leaves them with up to a million dollars extra to do what they want with in retirement. And if they decide not to spend it all, instead leaving it to their family as an inheritance, it’s fairly liquid and easy to distribute, relative to a house.
They could also choose to put that extra million to work. For example, at today’s rates, a 10 year fixed term annuity with a $1 million initial investment, with capital returned at the end, could pay a $40,000 income every year. That’s a handy bit of extra pocket money. Plus you get the million dollars back at the end.
What could you do with all that extra money?
What about the few retirees today who are renting? What do they do with the extra money they’ve saved by downsizing to a rental property?
Some are using it to travel. In the aforementioned AHURI research, one respondent said that he was planning to travel with his partner, and valued the ability to ‘just close [our] front door and go.’ With tens (or hundreds) of thousands of dollars in your pocket, you could certainly afford to take a few nice holidays. Perhaps head further afield than you normally would. Or treat yourself to a lie-flat bed on long-haul flights. Or go the stereotypical route and book a months-long luxury cruise.
According to the Association of Super Funds Australia (ASFA), many spend a significant amount on lunches and dinners out. A couple on a statistically ‘comfortable’ income level spends over $80 a week on alcohol, plus lunches and dinners out. With the extra money you’re saving, you could eat your way around the fine dining establishments of your home city, ordering whatever you like.
Or, as suggested in the section above, you could put that money to work for your children and/or grandchildren. Create a balanced portfolio that offers an equal (or higher) rate of return, plus way less transaction costs, than you would have got if you’d simply relied on the capital gain on your home.
Contributor, Money Morning
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