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Nest and nest egg: 23 aspects of housing and ageing

This article summarises research by the ARC Centre of Excellence in Population Ageing Research (CEPAR) which focusses on research in the field of population ageing. The full report is attached at the end of the article.

In Australia, the topic of housing occupies many a newspaper column, barbeque conversation and research report. Just over half (or $6.3 trillion) of Australian household wealth is stored in housing, distributed across 10.3 million residential dwellings, which are among the most expensive in the world.

The family home not only fulfils everyday needs as a shelter and a place for family and social relations but can also act as a store of value and a guarantee of financial security in retirement. It is both nest and nest egg. 

Housing outcomes therefore affect financial and personal health and wellbeing over the lifecycle. And as lifespans increase and Australia’s population ages, it is important to examine the interactions between demography and housing. Home ownership is often considered another pillar of the retirement income system, in addition to the age pension, and mandatory and voluntary superannuation.

Here are our major conclusions on home ownership.

1. Home ownership serves multiple purposes over the lifecycle: It acts as a home as well as a store of wealth to guarantee financial security in retirement. Its lack in old age compromises security of both tenure and finances. 

2. Home ownership appears to be in decline: Depending on the measure, total home ownership in Australia currently ranges from 59% to 70%. Across all measures, home ownership is down 3-4% in the last two decades. Drops are led by young households of all incomes and middle-aged households with low incomes.

3. Much of the decline may be due to declining affordability: Over the past 20 years, house prices grew faster than household incomes. Common explanations point to cyclical as well as structural factors. These include:

(1) a surge in rental demand from new migrants (3.7 million since 2000)

(2) lower cost and greater allocation of credit to investors, supported by tax rules (negative gearing and capital discounts)

(3) a supply lag (of about 10 years between peak increase in demand and peak increase in supply, up from 3-5 years in the past).

4. Higher prices and lower borrowing costs have changed the dynamic: Across the income and house price distributions, deposit hurdles increased while borrowing costs decreased (in the past two decades, years to save for a hypothetical deposit for households with income in the second quintile buying a house in the second quintile of prices increased from 4 to 6 years, but repayments were down from 44% to 36% of income). A low initial saving hurdle in the past meant that house purchases functioned as a commitment device to save. It is less available now.

5. Declines in home ownership must be seen in a wider demographic context: The median age of first buying a house decreased in the 1960s-70s as home ownership became widespread. It has since increased by 9 years from 1981 (from age 24 to 33). But deferral in home ownership accompanies delays in all other major life events over the last half-century, as shown below.

These include a delay in the median age of getting a first job (2 years), finishing education (5 years), having a child (7 years), getting married (8 years), and dying (12 years). Deferring their first home purchase by 9 years would still probably see younger generations enjoy home ownership longer than their parents.

6. Indefinite deferral of home purchase has consequences: Lifetime home ownership rates will decline if some people defer indefinitely. Banks may be reluctant to lend past a certain age given retirement ages are increasing more slowly (by 3 years over the past 50). More people may retire with debt (36% of homeowners do so now). Some people receive help for home deposits from parents but higher gifts go to those with higher income. Modelling suggests that there is no imminent wall or wave of bequests in sight and that bequest recipients are getting older.

7. Demographic change may make things easier: In the short-term, demand for housing is expected to remain strong, so supply declines are concerning. Over the long term, base projections see a shallow deceleration in growth of demand, but the range of possible outcomes is wide. Also, cross-country variation in house prices and demographic change suggest that population ageing could weigh prices downwards.

8. In the meantime, the retirement income system is failing renters: The continued exclusion of the home from the pensions means test, undifferentiated age pension payments, and rent assistance levels that are pegged to the wrong index, result in a wide financial gap between renters and owners. The system review reporting in 2020 is an opportunity to narrow this gap. While super is important for young, low-income households, we are yet to understand how much it constrains their investment in housing. The two are complements. Super is more liquid in retirement while housing investment can be leveraged and therefore results in greater wealth accumulation when prices are rising.

9. Older renters continue to experience significant vulnerability: Often-quoted figures that old-age poverty in Australia is high, are inaccurate. But new estimates that take account of housing suggest that older Australian renters have among the highest relative poverty rates in the OECD. They also have greater rental affordability stress than other age groups. While increases in measured homelessness among older women were due to greater numbers in this age group rather than higher incidence, their increased use of homelessness services was disproportionate.

10. Income and house prices: Modelling shows that an extra dollar of income increases house prices in NSW by more than a dollar and that price sensitivity increased with proximity to Sydney.

11. Deferral of home ownership: Research found little indication that home ownership fell for Generation X. Later rates of marriage were a key driver of home ownership delay. Analysis of trade-offs between renting and buying shows that initially renters do tend to consume more than owners, but that this reverses.

12. Migration and housing: Recent and temporary migrants tend to rent apartments (about 75% of long-term temporary arrivals rent). Increases in migration are likely to therefore overstate home ownership declines.

13. Demography and house prices: Higher house prices were observed in countries and periods where shares of prime-age workers were higher. An estimated 7% of the increase in real house prices in Australia between 1970 and 2015 was due to changes in age structure. Projections suggest a reversal in the future.

14. Housing bubbles and macroeconomic risks: Studying the bursting of the US housing bubble shows that a key contagion channel was the reappraisal of risk rather than the wealth effect on home owner balance sheets.

15. Supply response: NSW regions have higher housing supply responses than Sydney but are still relatively low given fewer land constraints. Councils appear inhibited by State rules.

16. Treatment of assets in the means test: It’s possible to combine age pension means tests by having them separate but applied consistently. Exempting the home in the test is shown to inhibit downsizing, but effect is small.

17. House purchase triggers re-evaluation of retirement finances: Super contribution behaviour changes around the time of taking out a mortgage. Owner-occupier mortgagors appear to increase super contributions while investors rebalance toward property. Buying a house also increases interactions with super.

18. Wealth accumulation in an ageing society: Ageing alongside greater age pension means testing can result in greater private asset accumulations and lower pension spending, driven by longer-lived high-income groups.

19. Downsizing: People over 55 downsized:

(1) because the house or yard was too big

(2) to be closer to family

(3) for lifestyle

(4) to alleviate financial stress.

Older people are less likely to regret their decision to move to a smaller place compared with those who downsized at younger ages. Half of older women are choosing to age in place, but many live alone. Changes are often due to health concerns.

20. Retirement products: A reverse mortgage on a CBD house is riskier and should attract a higher risk premium. Lump-sum reverse mortgages are more profitable and less risky to providers than income stream products, explaining why the former dominates most markets. Explaining reverse mortgages well can raise interest in them. The more wealth is in one’s home, the more optimal it is to annuitise the remaining wealth since home equity acts as a form of precautionary savings to cover healthcare expenditure and as a bequest.

21. Bequests: Property made up 70% of assets of those dying aged 65-84. Research confirms that bequests are being delayed as life expectancy increases. Pensioners hold on to assets rather than spending them to maximise pension income.

22. Adapting housing and neighbourhoods: The housing stock is ill-equipped to meet older people’s needs with respect to safety and accessibility measures. Key modifications would prevent falls at home if discharges from hospital involved an occupational therapist home visit, and simple exercises also help. Mental health and venturing beyond the home (e.g. by being able to drive) were positively correlated.

23. Who can expect financial hardship in old age, and for how long? Single older women with low education who rent their home could expect to live 7.7 years of retirement in financial hardship (e.g. unable to heat the home, missing meals, or pawning items). Hardship expectancy for women with similar characteristics but who owned their home was half that. Older renters are likely to have less family support and more depression.

 

Rafal Chomik is a Senior Research Fellow at CEPAR and responsible for the Centre’s research translation program. Sophie Yan is a Research Fellow at CEPAR.

 

The full research paper

This brief for this research was in three parts.

It first tackles the dynamics of the housing purchase in working life, describing the patterns of housing tenure across generations, demographic and market dynamics, the likely future effects of demography on housing demand, and the policies that can affect home purchase outcomes, particularly taxes.

In part two, the brief considers housing consumption in old age, discussing the retirement income context, the value and distribution of housing wealth, the preference of older people for remaining in their community, and how older people bequeath or can make better use of the equity in their home in retirement.

Finally, part three tackles housing lack in old age, describing the implications and vulnerabilities that arise from renting in retirement. Overall, the brief provides a broad stocktake of research that touches on many different areas of housing-related policy.

Download the full research brief here.

 

 

10 Comments
Allan
December 01, 2019

This article details much, but leaves out the final stage, aged care and rolling into it with a large deposit from the sale of the family home. That requirement changes the picture for all investment choices in the lead up.

Jeff Oughton
November 29, 2019

Congrats to CEPAR - especially pages 30-33

A comprehensive and independent report that reaches a sound conclusion about the current lack of effective governance and competition in both the govt and non-bank offerings in the residential loan market to unlock savings in the home and boost the income of older low and high income Australians in retirement.

The financial engineering of the income payments associated with a lifetime loan is easy – albeit selling with disinterested advice and overcoming buyer stress or other issues is difficult for some.

There's little, if any, equity or credit risk in unlocking a relatively small amount of savings in the owner-owned home of low income older Australians by regular payments to boost their incomes and well being.

Effectively, it's an income payment to low income older Aussies backed against AAA covered residential loan/bond/asset that should be funded or better packed by the govt or internalised by super funds and sold to their members or global investors at well less than the borrowing cost from both the govt's pension loan scheme and non-banks at 5% or more! Indeed, the govt's NIFC sells similar bonds at 65 basis points above govt bonds, while covered bonds issued by Australian banks sell at a margin of 0.8% over Aussie govt risk - less than 2%.

The govt at Centrelink and non-banks with related financial advisers are selling some today, but the price is way too high - so mainly low income, desperate or ill-advised people will buy and there’s a big opportunity cost.

There's a big wait at Centrelink - so asset rich elderly low income Aussies that do not qualify or cannot wait, head for expensive non-bank offerings.

In short, the current market lacks effective institutional governance and competition and innovation by both the govt and non-bank providers.

At a macro level, it's also not good for growth and jobs for younger Australians - or the national interest.

Currently, this institutional/market failure means the vast majority of low income older Australians over save and die in their home or sell the home/pay off the loan and then enter aged care with excessive savings and younger Australians stay unemployed and wait for a bigger inheritance.

David
November 28, 2019

As a movie buff I remember a movie about the life of an uneducated peasant who became president of Mexico. At one stage when advised that the economy was in bad shape and running out of money he responded: well print more. People in the audience laughed. However now it is called QE and treated seriously.

I once had the privilege of attending a lunch with Milton Friedman. In the Q&A someone asked why the US dollar was going down. He responded with a straight face that there was something called supply and demand and if the price was going down then there was more supply than demand. However he also said: inflation is taxation without legislation.
So how does QE help anyone? Certainly not the dopes who have worked all their lives to support themselves in old age only to find their cash to be of declining value compared with assets such as property bought recently with low
interest loans by younger people. Maybe we should just stockpile expensive alcohol and drink ourselves out of it. The youngest sector would probably thank us for getting out of the way.

John
November 28, 2019

I seem to recall that many years ago, when super commenced, that contributions were tax free and the earnings within the super fund was also tax free.

I have an issue with the graph
Lifetime government support provided through the retirement income system

and in particular the part dealing with contributions and earnings tax concessions. I suggest that the problem of super tax concessions can be attributed solely to peter Costello when he made pensions from a super fund tax free.

Under the initial system (super funds didn't pay any tax on earnings or contributions) the member of the super fund paid income tax on the pension that was drawn from the super fund.

effectively, if you put money into super, you didn't pay any income tax that year, but when you withdrew the money from the super fund (ie drew a pension) you were then taxed on the income received. putting money into super was therefore not a tax reduction scheme, but rather a tax deferral scheme.

then paul keating changed things. he put a 15% tax on contributions and a 15% tax on super fund earnings. BUT, when you drew a pension from the super fund, you were taxed on the income, but you got a 15% tax rebate on that income (the 15% number is no coincidence, the super fund paid 15% tax on contributions it received, and its earnings, but when the member was paid the pension that came back to him).

It was sort of a withholding tax - keating obviously needed to improve the budget bottom line, and getting 15% off the super fund did that (in that year) but the government would pay for it later (when the super fund started to pay a pension) because the income generated from the pension would be taxed effectively 15% lower than ordinary income. The government got the money now, and gave it back later. Sounds a bit like the franking system that keating also introduced, company pays 30% now, but when it pays out a dividend, then the individual pays tax on the whole dividend (grossed up) but then gets a rebate for the 30% that the company had already paid - effectively, if you ignore timing, the company pays zero tax.

The next big change to the super taxation system was Costello. he made pensions from super funds tax free. Now for someone who drew a pension of about $40k it made no difference to their tax at all. Marginal tax rate for the individual was 16.5% (including medicare) and they got a rebate of 15%, so effectively zero tax. But for a person who was on a high income (and MTR) they used to pay tax at their rate (say 46.5%) less the 15% rebate, so when Costello made super pensions tax he gave nothing to the low value super pension account holders, but a lot to the high value ones.

if the government were to reverse The Costello tax free super pension change, and started taxing pensions again (less the 15% pension rebate) then all of the problems of tax concessions would be eliminated. High income earners would still get a bit benefit in the short term (paying only 15% contributions tax instead of their MTR) but would pay for it later when then started drawing a super pension. By reversing the Costello change, all that super would do is postpone a tax payment (by evening out income over a lifetime rather than just over a working life). Its not too far distant from what farmers can do with income equalisation.

hope these thoughts are helpful. happy to discuss further if you wish


Fred
November 29, 2019

And if you maintain the minimum pension draw downs then those with higher balancEs must draw higher income that will push them into higher tax brackets

Jon Kalkman
November 29, 2019

The tax on pensions that applied before the Costello changes in 2007 only applied to the proportion (not the amount) of concessional contributions within the fund and those proportions are frozen when the pension starts. By definition, large funds hold large proportions of non-concessional (after-tax) contributions and therefore the taxable proportion of each pension payment would generally be quite small (even with large pension payments from large funds).

That tax arrangement still exits on death benefits today - something that most people seem unaware of.

The tax liability on the super pension was then further reduced when the 15% pension rebate was applied. In reality not much tax was collected from super pensions before 2007 and so by making all withdrawals from super tax-free after age 60, Costello was able to generate enormous political capital with little fiscal cost to the Budget.

I explained this more fully here: www.firstlinks.com.au/myth-costellos-generosity-tax-free-super


John
November 29, 2019

With our franking credit system the same "slight of hand" applies when the government says it is going to reduce the corporate tax rate.

Take for example a company that earns $100 in profit. It pays corporate tax on this at 30%, so $30 goes to the government. Eventually the company pays out the after tax profit to its shareholder, so the shareholder gets $70, but in their tax return has to put the $70 cash, and gross it up for the tax already paid, so the individual includes in their tax return $100. This then gets taxed at their marginal tax rate. For illustrative purposes, assume that the tax rate is 46.5%. The individual then owes $46.50 in tax, but as the company has already paid $30 in tax, the individual has to pay only $16.50. If the individual's tax rate is 31.5%, then they have a liability of $31.50, $30 of which is already paid, so they have to pay $1.50. and if the individual isn't liable for tax, then the individual gets a refund of $30. From the government's point of view, it gets a total of $46.50 ($30 from the company plus $16.50 from the individual) from the first individual, $31.50 ($30 from the company and $1.50 from the individual) from the second, and nothing (it collected $30 from the company, and then refunds $30 to the individual) from the third

Now lets consider if the government "slashes" the company tax rate to 10%. In this case, the company makes $100 in profit, but now only pays $10 in tax. now the first individual pays $36.50, the second $21.50 and the third gets a refund of $10. The government from these three individuals collect in total (when added to the company's tax collected) $46.50, $31.50 and zero.

But in the process, the government has managed to create a headline "government slashes taxation" and gets votes. Slight of hand! The best tax cut you can have (from the government's point of view) - a great headline that has cost the budget nothing

so much for Australia having one of the highest company tax rates in the world! In fact, Australia has a zero company tax rate

Lewis Waters
December 01, 2019

John, your analysis of tax in superannuation and on Companies shows that you have no understanding of the situation. To suggest that companies are paying no tax because the shareholder gets a credit against his total tax bill is wrong. If the shareholder did not get this credit he would effectively be paying double tax. You cannot tax the same income twice. If the taxpayer invests directly, instead of through buying company shares, he ends up paying exactly the same tax as he does under the imputation system. This is the problem we have in Canberra. Politicians, who are mainly solicitors, do not understand tax unless they are specialists in this area.

Warren Bird
December 02, 2019

Not quite, Lewis, it's a bit more nuanced than that. The imputation system exists to completely integrate the company tax and personal tax regimes so that the income earned by companies is taxed in the hands of the shareholder. Where that shareholder is foreign, the income is taxed at the company tax rate, currently 30%.

The economics of this is identical to a situation where the company tax rate is zero and all earnings are distributed to the shareholders and taxed as ordinary income for them, plus a 30% withholding tax on earnings paid to shareholders who aren't taxed in Australia.

So in that sense, John was actually correct. There is, in essence, no "company" tax. Where he's wrong is in suggesting that this means that company profits are not taxed. They are, and based on the estimates I came up with during the franking credit debate, the average rate of tax paid on those profits is actually higher than 30% since there's more shareholders who are in the top marginal tax bracket than there are in the lower tax brackets, including zero. Also, foreign shareholders do pay the 30% tax rate.
Finally, John's missed the very clear element of the debate about the company tax rate, which has recognised all along that it's primarily been about the tax levied on foreign shareholders and how competitive that is globally. There's been no slight of hand in this. Rather, it's as you say at the end of your comment - many politicians don't understand how the tax system actually works in a financial and economic sense. This was evident in the franking credits debate and is often on display in other contexts, including discussions about payroll tax (which is a tax on consumers, not a tax on jobs) and the company tax rate debate.
Oh how this former Treasury officer despairs of the way policy is debated in this country!

Joe J
November 28, 2019

Talk to most people in their 30s and their main financial priority is still buying a home, and nothing to do with super. They will go to great lengths on delaying having children, working two jobs, starting with a smaller place, anything to get started on the ladder. This article shows that makes good sense, given the consequences of not owning a home in retirement.


 

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