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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.  


September 30, 2020

Contra view: Consider if you had never bought a house, but had invested the significant difference between rent and mortgage payments in Sydney into the shares of global, high growth, high margin, cashed-up, wide-moat, low capital intensity tech companies over 20+ years. e.g. Apple or Microsoft have quadrupled in just 5 years. Apple is up 100-fold over 20 years. Both old world, stable, lowish-risk, profitable, dividend paying companies. Amazon up by a factor of 6 over 5 years, before further gains from gearing, like home buyers do. No home maintenance costs and no need to lose out on price growth while saving for 5 years for a home loan deposit. Millenials know software is eating the world and cloud services are exploding and wildly profitable. That's not gonna stop any time soon. Rent, don't buy your home.

Mary Peters
June 23, 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:

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

John Pracy
March 01, 2022

Its indirectly. The difference between Homeowner and non Homeowner asset test limits. That wasn't made clear.

June 19, 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.

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.

June 17, 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.

June 21, 2020

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

June 17, 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.

June 17, 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 17, 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 17, 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 17, 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.

May 16, 2021

Not all people renting are 'poor'. It is an outdated assumption. Many people choose to rent and have wealth in other assets. So, if I wanted to save say more than Million in cash but choose to rent, why does that count against me on the asset test? For that reason alone it is unfair to 'force' people into home ownership so that that asset will not be counted for the age pension. It is discriminative and should be addressed by policy makers. Even if by way of formula.


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