The Baby Boomer impact on real estate | Why rightsizing needs policy intervention to free up supply (Ep.110)
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In this week’s episode, Dave, Cate and Pete take you through:
Who are the baby boomers?The baby boomer generation were born between 1946 and 1964 and would be currently be aged between the ages of 57 to 75 years. Baby boomers make up 25% of the population, but own more than half of Australia’s national wealth (53%). Given the baby boomer generation have the highest home ownership rate of all cohorts (above 80%), a lot of their wealth would be tied to property. Their economic footprint is twice as large as their demographic footprint, however, due to compound growth over time, it makes perfect sense that the older cohort should have proportionately more wealth than younger ones.
Effects on Australian residential property. Unlocking the baby boomer’s wealth in property (which could be around two trillion dollars), could be critical to the future of home ownership rates, and potentially also to the creation of seniors’ accommodation, and to aged care policy. As our population is ageing, there will be added costs associated with supporting the older generations, plus more demand for suitable property for our older generations (including aged care). Lower home ownership rates have been recorded in younger generations, no doubt due to other social reasons, including people choosing to get married and start a family later in life. A study by the productivity commission concluded that 60 per cent of people born between 1942 and 1951 (early baby boomers), owned homes by age 25-34. This dropped by 15 percentage points to 45 per cent for those born 1982 to 1991.Technology, affordable travel, less social pressure to marry and have children, and the proliferation of casualised and contract employment have all, no doubt, played a part in this changed trend.
Rightsizing vs downsizing. The term rightsizing has gained popular use, as many people may choose to downsize their yard or internal floor area, but not necessarily downsize their budget. This include those who choose to have a second dwelling – a tree or sea change home, plus an inner city pad to stay close to the action, friends and family. City living offers many benefits, including proximity to the airport and hospital/care facilities. Now we are seeing many choose to take a side-step, rather than a downsize. Some even enjoy an upgrade option into a smaller and more optimally located dwelling.
What causes people to stay in their long-term home and what are the effects?There are many reasons, lifestyle related and financial which cause people to choose to stay in their home rather than downsize. 8 out of 10 people want to ‘age in place’, meaning that they don’t want to downsize. They are comfortable, close to their friends and family, their current home suits them best, plus the logistics of having to organise a move feel like a burden. In addition, if a downsizer has retired but hasn’t paid off their mortgage, obtaining another mortgage becomes increasingly difficult. This causes the problem of ‘underutilisation’ in the property market, which is where people own a home with more bedrooms or more yard space than they need. The trio discuss what that means for younger families looking to upgrade.
Government incentives to downsize miss the mark. A number of initiatives have been introduced by State and Federal Government to encourage older generations to downsize, including: state stamp duty relief, NSW abolishing stamp duty and Super contributions beyond the current concessional limits. However, none of these initiatives deals with one of the critical financial obstacles to downsizing, which is that selling the home and converting it into a financial asset could reduce the age pension and increase contribution to aged care. They also do not address the abundance of non-financial considerations which drive the decision to rightsize or stay in place.
Righsizing traps to avoid. Those who are approaching the flexibility stage of life or currently transitioning to retirement need to think about what they want in a home. A maintenance or a renovation project is most likely not on the cards for those who are ready to start relaxing. Many get excited by buying brand new, off the plan, properties. For those wanting to pass property to their kids, these properties often have limited prospects of capital growth, or at the very least they underperform due to insufficient “land to asset ratio”. They also risk a long wait time from signing the contract to moving in, which can be frustrating for anyone who is excited about the prospect of moving into their new home.
The greatest intergenerational transfer of wealth is yet to be seen. 85% of Australians who do rightsize, plan to do so before age 70. With the current cohort of baby boomers, between the ages of 57 to 75 years old, we have 13 more years of baby boomers expecting to sell up. The rest are likely to stay in place until they must move or will pass property on in their inheritance. What this means is that we’re likely to see the greatest intergenerational transfer of wealth over the next 20 years or so.
Baby boomers make up 25% of the population but own more than half of Australia’s national wealth (53 per cent) –given they have the highest home ownership rate of all cohorts (above 80%), that a lot of that would be tied into property.
Their economic footprint is twice as large as their demographic footprint.
The boomers have been the beneficiaries of a near 50-year economic miracle which is called Australia, and they are unlikely to ease out of this accumulating any time soon, which see Australians on average the wealthiest country per capita in the world based on various benchmarks.
That said, due to compound growth over time, the older cohort should have proportionately more wealth.
Also, Australia’s productivity levels have been declining, so you could certainly debate that their wealth is well earnt through hard work. Success doesn’t come by chance very often.
Overall, it’s a home-owning, mortgage-light, “asset rich, cash poor” generation which the Productivity Commission concluded “owned most of Australia’s home equity”.
Unlocking that wealth in property – which is around two trillion dollars’ worth – could be critical to the future of home ownership rates, and potentially also to the creation of seniors’ accommodation, and to aged care policy as part of our aging population and the added costs related to this.
Disincentive to sell and downgrade.
Increase pressure on single level dwellings – future proofing property, creates issues for others that have this key requirement
Increase in demand for inner city living.
Lower home ownership rates occurring in younger generations, people getting married later, having kids later.
60 per cent of people born between 1942 and 1951 (early baby boomers), owned homes by age 25-34.
This dropped by 15 percentage points to 45 per cent for those born 1982 to 1991.
Uniform distribution – dwelling type which tends to be classified, more likely to be on a house on a full block and more likely to be in a house above the median.
Less of those types of properties being sold, meaning younger families need to live further away from where they work – CBD
Under-utilisation – most people prefer to stay in their home, even when they have multiple bedrooms – eg: two people living in a four-bedroom house.
What causes people to stay in their long-term home?
Tax burden – disincentive for them to sell
Ease of trading – vacate, moving out, need time, it’s not easy to do.
In markets like the one we’re in now, its difficult for upgraders and downsizer to take action – fear of selling and being home less, or buying and not being able to fund the move.
8 out of 10 people want to stay where they were – comfortable, friend and family, current home suits them best.
Elephant in the room – selling could impact the age pension eligibility
Difficulty in obtaining finance later on in life – If you are downsizing, but you haven’t paid off your mortgage, how does it work – look at super and other forms of income when you retire. SMB needs to show the plan and exit strategy – there is a way that you can extinguish the debt at some point in retirement.
Selling an investment to pay down debt on the home – if there is enough equity
Ability to show you can pay the debt and still have enough superannuation left over to fund a reasonable lifestyle.
Rightsizing v downsizing
May downsize the yard or the internal floor area, but not necessarily downsizing the budget.
Some may have a second dwelling – tree or sea change, plus an inner-city pad.
Lock and leave inner ring pad
Superb apartment with all the luxuries
Move to the city to enjoy all that the city offers – be close to the airport plus hospital and care.
It’s now more of a side step, then a downsize.
Some baby boomers are getting a little nest egg or a big surprise.
They are making the decision to enjoy the years, they want to use it wisely and make sure they have a fantastic rest of their life.
baby boomer – 57-75 – 85% of aussies who do rightsize, which is about 2 to 4 people out of 10, plan to do so before 70. 13 more years of baby boomers to sell up, this will be the greatest intergeneration transfer of wealth that we’ll ever see, either sold or handed down over the next 1 to 2 decades.
You don’t want maintenance and a renovation project. Once the kids have moved out, they may go out and buy furnishings that make them feel good about their home.
What they could do, is get excited about buying off the plan – they could buy a bad asset. If they’re excited about picking their colours and fittings, that’s great, but they’re not thinking about how that asset will perform. If they want to hand something down to their kids, that may not be the best.
Long sunset on off the plan, can take a while to
State stamp duty relief,
Super contributions beyond current concessional limits,
NSW abolishing stamp duty argues land tax proposal would help rightsizers.
None of these initiatives deals with the major financial impediment to rightsizing.
Most home-owners are on some form of pension, the assessment of which excludes the value of the home. Selling up, and turning the home into a financial asset, can reduce the pension and ultimately increase the contribution to aged care.
Nor do they address the plethora of non-financial drivers. Homes are far more than assets to be monetised. They are anchors for life, full of memories, a base for family, and close to friends and well-used facilities.
2003 had the most property sold – this was the last time baby boomers had to trade up to a bigger home – highest level of turnover
David Johnston – The Property Planner’s Golden nugget: We have an ageing population. From the years 2000 to 2020 – the proportion of the population aged 65 years and over and therefore most retired, increased from 12.4% to 16.3%, expected to be a quarter of the population by 2060. There’s less people working, less people contributing to tax and less money to go around to support our nations growth. Getting the policy settings right is really important, it will help alleviate social problems and help make property more affordable for those coming through, who are having families currently and planning to have families into the future. It’s really important area of policy that needs to be thought deeply about and get right to set ourselves up for continued wealth and prosperity, as the baby boomers have been fortunate enough to live through and certainly create, for those of us Gen X and millennials, who have come after the wonderful baby boomers.
Cate Bakos – The Property Buyer’s Golden nugget: For people who are thinking about development, have a really good think about the area and whether there is demand from baby boomers. Expensive suburb in middle or inner ring, think about how you will future proof it so it will attract them. People are looking for longevity – think about the floor plan and all the things that grandparents want – separate play area, low maintenance, bedroom on ground floor. Single level or avoiding stairs for daily tasks is very important.
Weekly market insights
Latest unemployment figures exceeds expectations. In the latest figures released by the ABS, the unemployment rate has come down to 4.9% in June from 5.1%. The last time we saw unemployment this low was in June 2011. On the other hand, underemployment has increased to 7.9% in June (from 7.4% in May). It’s probable this was caused by the extended lockdown at this time in Vic. Notably, Vic has the lowest unemployment rate of all the states and territories, with unemployment at 4.40%.
Time to buy a dwelling index shows slight improvement. The ‘Time to buy a dwelling’ index produced by the Westpac Melbourne Institute has shown an increase of 0.8 points to 96.9 from June to July. Although an improvement, it is still in negative territory, with the index down substantially from its peak in November 2020 of 132 points. The consistently weaker trends likely reflect concerns about the impact of sharp price increases on affordability, especially amongst prospective first home buyers and owner occupiers.
Lowest vacancy rates nationally since May 2011. National vacancy rates recorded by SQM research show the economy continues to move in a very positive direction. The vacancy rate fell from 1.8% in May to 1.7% in June, which is the lowest vacancy rate since May 2011. The Sydney and Melbourne CBD apartment market also shows positive steps to recovery, with Sydney falling 0.5 to 6.3% and Melbourne falling 0.3 to 5.8%. It is fair to mention that despite the oversupply of CBD apartments in our two capital cities, the overall vacancy rate is extremely tight and is illustrating a growing concern for the plight of renters.
NSW relief packages for residential landlords. In an effort to assist NSW residential landlords, a grant of $1,500 or land tax reductions are available for landlords who come to an agreement with their tenants to decrease rent, to assist with reduced incomes due to Covid. The trio discuss the merits of this policy, which is able to offset some of the loss that generous landlords are shouldering.
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