Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 362

Housing cost is biggest threat to a comfortable retirement

There’s no shortage of issues facing people planning for their retirement. One that needs tackling is the threat worsening housing affordability and falling home ownership will present to the retirement incomes of many Australians.

How ownership critical for comfortable retirement

Most retirees today feel more comfortable financially than younger Australians who are still working. Retirees are less likely than working-age Australians to suffer financial stress such as not being able to pay a bill on time and are more likely to be able to afford optional extras such as annual holidays.

In fact, most people aged 65-84 today have as much or more income than they did 20 years ago when working. And while the age pension is by no means generous, it does keep most low-income retirees out of poverty – provided that they own their home.

As for future retirees, Grattan Institute research shows that most working Australians today can look forward to a standard of living in retirement that’s on par with their standard of living while working, and often higher. Retirement incomes also remain adequate for most Australians even when they work part-time or take significant career breaks, such as to care for children.

But we’re failing retirees who rent

Not all Australians enjoy a comfortable retirement. Senior Australians who rent in the private market are much more likely to suffer financial stress than homeowners or renters in public housing. Nearly half of retired renters are in poverty once housing costs are taken into account.

The explanation is simple: retirees spend a lot less on housing as they pay down their mortgage, but housing costs keep rising for retired renters. The typical homeowner aged over 65 spends just 5% of their income on housing, compared to nearly 30% for renters.

More retirees will rent in future

The proportion of retired renters in financial stress will increase because younger people on lower incomes are less likely to own their own home than in the past.

Between 1981 and 2016, home ownership rates among 25-34-year-olds fell from more than 60% to 45%. Home ownership has also fallen for middle-aged Australians. Home ownership now depends on income much more than in the past: for 25-34-year-olds, home ownership among the poorest 20% has fallen from 63% to 22%.

Today’s younger Australians will become tomorrow’s retirees. These trends suggest that by 2056 just two-thirds of retirees will own their homes, down from nearly 80% today.

So what should the federal government do?

Boosting Rent Assistance should be the priority

The government’s first priority should be boosting Commonwealth Rent Assistance, which has not kept pace with rent increases over the past two decades. Raising Rent Assistance by 40%, or roughly $1,400 a year for singles, would cost just $300 million a year if it applied to pensioners, and another $1 billion a year if extended to younger renters as well.

And in future, Rent Assistance should be indexed to changes in rents typically paid by people receiving income support, so that its value is maintained. Boosting Rent Assistance would do much more to reduce poverty in retirement per government dollar spent than the alternatives, including lifting the age pension.

A common concern is that boosting Rent Assistance would lead to higher rents. But that’s unlikely: households would not be required to spend any of the extra income on rent, and most would not.

More social housing is needed but not for everyone

There is also a powerful case for more government funding of social housing, including for vulnerable older renters at risk of homelessness. It would also be an effective economic stimulus given COVID-19. But boosting social housing will be expensive. Increasing the stock by 100,000 dwellings would require additional ongoing public funding of about $900 million a year, or upfront capital expenditure of $10-$15 billion.

It would be prohibitively expensive to provide enough social housing to accommodate all renting pensioners, let alone all working-age Australians on low incomes. So any boost to social housing should be reserved for people at greatest risk of long-term homelessness.

Include the home in the pension assets test

The age pension exacerbates the divide between the housing ‘haves’ and ‘have nots’ in retirement by favouring homeowners over renters. Once a person is retired, their home is treated differently to their other assets. Under current rules only the first $210,500 of home equity is counted in the age pension assets test. Which is why $6 billion in pension payments go to people with homes worth more than $1 million.

It’s time for more of the value of the family home to be included in the pension assets test, above some threshold such as $500,000 would be fairer and would save the budget up to $2 billion a year.

No pensioner would be forced to leave their home. Instead this change would primarily reduce inheritances. Pensioners with valuable homes could continue to live at home and receive the pension under the government’s Pension Loans Scheme, which recovers debts only when homes are eventually sold.

A $500,000 threshold would ensure that homeowners would still have substantial equity to pass on to their beneficiaries. It would ask people with high levels of wealth that would otherwise be passed on to heirs to use some of this wealth to support themselves in retirement.

Higher house prices also mean that Australians are spending more of their lifetime incomes buying a house and paying it off by the time they retire. Yet few retirees draw down the value of their home to fund their retirement, either by downsizing or by borrowing against home equity.

Unless Australians are willing to draw on their home equity in retirement, rising house prices mean Australians will be left with lower living standards both while working and in retirement.

 

Brendan Coates is the Household Finances Program Director and a Fellow at Grattan Institute. This article is general information and not personal advice.  

 

11 Comments
Mary Peters
June 24, 2020

Your Writer clearly states that under the current rules, only the first $210,500 of home equity is counted for pension assets test. When did this happen?? Mary

Brendan Coates
June 25, 2020

The home is not included explicitly in the assets test. But the difference in the asset free areas for the pension between homeowners and non-homeowners means that in effect the first $210k of the home is included in the assets test for the pension.

See here: https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get/assets-test/assets#assetstestlimits

You can see the difference for the asset free area for single pensioners between homeowners ($263,250) and non-homeowners ($473,750).

Jack
June 20, 2020

What we need is a death tax - but only on age pensioners. Those with few assets (the majority) would not be affected. The estates of those with expensive houses would pay the tax. Since the taxpayer does not claw back the taxpayer contribution until after death, there is no need to move house, no need to reverse mortgage and it does not upset plans for age care.

People who sell up before death will find that the equity released from the sale of the family home is caught in the assets test and reduces the pension. That is what happens to downsizers now and explains the reluctance of many to do so.

Because it would be a tax on the whole of the age pensioner’s estate, the age pension could be available to anyone of pension age who was prepared to sign over some of the proceeds of their estate to the government in order to increase their income in retirement. Then we wouldn’t need the army of bureaucrats in Centrelink deciding on who gets what and how much.

There would be no need for means tests but it would certainly change incentives.

C
June 18, 2020

Hard to believe no consideration was made that Government’s could introduce policies to improve housing affordability. No mention of the negative effects of negative gearing. Or letting SMSF’s borrow for residential property. Or the likely long- term effect of letting people take 20 k out of their superannuation. Or the non- financial benefits that come from owning your own home or having a secure roof over your head. It may well be more costly to do nothing and maintain the status quo. Rent assistance ultimately benefits landlords. If people on minimum full-time wages need rent assistance to rent the cheapest housing then either the rent is too high or the wages are too low. Social housing saves people from homelessness and gives them stability and dignity. I would like to see a large investment in more social housing. I would also like to see more home ownership. Perhaps the Government could introduce some kind of deposit bond, or partial ownership structure. The Government could lend the deposit bond, which could come with the condition that the house was kept owner- occupied for a minimum of 10 years, if they wanted to sell before then ,they would have to pay the deposit back with extra interest. The Government could have first option to purchase and so increase social housing .Many people pay similar amounts in rent or more than the equivalent mortgage payment and just can’t save the necessary deposit. This would only be for people who don’t own a home.

John
June 18, 2020

<"It’s time for more of the value of the family home to be included in the pension assets test">.
Brendan's Grattan Institute is a centre left "think tank". Even the ABC acknowledges this. Calling for action now (by a Coalition Government) would benefit the Labor Party as the Coalition would be slaughtered electorally after introducing such a change. Why? Most retirees end up on the aged pension at some stage and the vast majority of them own their homes outright, typically with values well in excess of the proposed $500k limit. Trevor is right - neither major party would dare, although the zombie apocalypse's fiscal cost may force reintroduction of death duties and a gift tax to stop avoidance.

Cam
June 21, 2020

Didn't Tony Abbott want to include part of the value of the family home in the assets test?

Aussie HIFIRE
June 18, 2020

I agree that it would be nice to see the value of the home taken into account for the age pension, but it’s going to be extremely difficult to do so and how should it done? There are so many issues.

The median house price in every capital city is above $500,000, and older people probably own more expensive ones than younger ones so they’re disproportionately likely to be affected and are not likely to be keen on having their houses suddenly taken into account. So they’re not voting for this policy, and likely neither are their kids who are going to inherit the home in the next 10 or 20 years.

A $500,000 house might be nearly a mansion in some rural towns, in Sydney or Melbourne it’s probably closer to a shack. Should they be treated the same way?

How many sob stories are we going to see about some poor widower who has lived in a house all her life and now has to move away from friends and family because otherwise she has to take out a reverse mortgage on her property and leave her children nothing?

Who is going to value the house? Is it going to be the local council, is it going to be a real estate agent, what will the methodology be?

So as flawed as the current system may be I don’t see it changing.

Trevor
June 18, 2020

At present by excluding the family home from the Pension Assets Test leads to upsizing rather than downsizing when funds become to retain and qualify for a part Age Pension and thus boosting the inheritance of the next generation tax free and extremely heavily subsidised by tax payers.

Even Superannuation on the death of a member passes to non financial dependents after being taxed.
This type of thought process and follow through pushes up the price of domestic property and put it out of reach of those looking to buy their homes at an affordable price.

Further, it encourages home owning age pensioners unnecessarily spend their everyday surplus cash flow on gambling, the GGs, Pokies, Lotto and Sportbetting so that under the Pension Income & Asset Tests they will qualify for a higher level of pension.

Superannuation balance are counted in the Pension Income & Asset tests towards qualifying for the age pension but unfortunately both Labor and the Coalition will not dare to include the family home in the Pension Asset Test.

Ken Ellis
June 18, 2020

Your comments are interesting however why should those that have saved and perhaps not enjoyed all the experiences that the renters have and are then penalised for past efforts. While I accept that some people have a bad run of luck I believe we in the majority are the results of the many decisions we made on our journey through life. At 82 years of age and having lived and worked in three different countries and observed the decisions of close friends and associates your proposal encourages the lack of responsible decisions for short term enjoyment at the expense of long term.

Daryl La&#39; Brooy
June 18, 2020

There is an error in the article, the principal place of residence is excluded 100% from the Age Pension asset test for homeowners by Centrelink.

Graham Hand
June 18, 2020

Hi Daryl, I understood Brendan's comment related to the different assets test for the age pension when the pensioner was a home owner or not. For example, the full pension goes to single person homeowner with assets of $263,250 while a non-homeowner has a limit of $473,750.

 

Leave a Comment:

     

RELATED ARTICLES

There’s a lot more to retirement incomes than super

Five ways to use the family home for retirement income

A simple method to help mitigate sequencing risks

banner

Most viewed in recent weeks

Who's next? Discounts on LICs force managers to pivot

The boards and managers of six high-profile LICs, frustrated by their shares trading at large discounts to asset value, have embarked on radical strategies to fix the problems. Will they work?

Four simple things to do right now

Markets have recovered in the last six months but most investors remain nervous about the economic outlook. Morningstar analysts provide four quick tips on how to navigate this uncertainty.

Welcome to Firstlinks Edition 374

Suddenly, it's the middle of September and we don't hear much about 'snap back' anymore. Now we have 'wind backs' and 'road maps'. Six months ago, I was flying back from Antarctica after two weeks aboard the ill-fated Greg Mortimer cruise ship, and then the world changed. So it's time to take your temperature again. Our survey checks your reaction to recent policies and your COVID-19 responses.

  • 9 September 2020

Reporting season winners and losers in listed property trusts

Many property trust results are better than expected, with the A-REIT sector on a dividend yield of 4.8%. But there's a wide variation by sector and the ability of tenants to pay the rent.

Have stock markets become a giant Ponzi scheme?

A global financial casino has been created where investors ignore realistic valuations in the low growth, high-risk environment. At some point, analysis of fundamental value will be rewarded.

How the age pension helps retirees cope with losses

It's often overlooked how wealthier couples can fall back on the age pension if a market loss hits their portfolio. The reassurance is never greater than in a financial (and now epidemic) crisis.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 376

The US tech index, the NASDAQ, peaked on 2 September 2020 at 12,058 and three weeks later closed at 10,632. On the same days, Apple hit US$137.98 and then fell to US$107.12. These falls of over 10% and 20% seem high but both were simply returning to their early August levels. It's hardly a rout when a month's gains are given back. The bigger issue is whether such stock corrections will scare off the retail 'Robinhood' traders.

  • 24 September 2020
  • 2
Interviews

Interview on new technologies with more potential to grow

For many global tech companies, COVID has boosted their revenues and pushed share prices to all-time highs. We are on the cusp of amazing technical advances and there are plenty of new opportunities.

Shares

Five reasons why Tesla is the everything bubble

As fewer professionals actively research the merits of a company’s prospects, stocks become disproportionately driven by capital flows. Prices disconnect from fundamentals and there's no better example than Tesla.

Retirement

Three retirement checks for when you have enough

Not every retiree needs to gun for higher returns, but a conservative portfolio can court its own risks, especially with bond rates so low. But some retirees prefer to settle for a lower income.

Shares

Hide and seek: the FX impact on global equity investments

As more Australians tilt their investments to global equities, they often overlook the exchange rate risk and fees. The move from US57 cents to US73 cents in six months shows the unhedged impact.

Economy

When America sneezes, the world catches a ...

The recovery from COVID-19 is looking more like a K-shape, with some companies doing well while others struggle. The pandemic seems more akin to a black swan, exogenous shock than a structural downturn.

Retirement

How the age pension helps retirees cope with losses

It's often overlooked how wealthier couples can fall back on the age pension if a market loss hits their portfolio. The reassurance is never greater than in a financial (and now epidemic) crisis.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.