The house-price boom could adversely impact your retirement

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The recent house-price boom is going to cost Australians thousands of dollars in retirement, a new report has warned. 

The Australian Institute of Superannuation Trustees (AIST), which represents all not-for-profit superannuation funds, recently commissioned Saul Eslake, an independent economist and vice-chancellor’s fellow at the University of Tasmania, to investigate the potential impact of rising housing costs in retirement.

Australia’s entire retirement income system is based on the assumption that homeownership is affordable, and that people stuck in lifelong renting will be helped by the state governments.

Current data has shown these assumptions to be “increasingly dubious,” said Eslake. 

In 2013-2014, about 88% of households headed by people aged 65 and older spent less than 25% of their gross income on housing, down from roughly 92% in 1996-1997, according to data from the Australian Bureau of Statistics (ABS).

However, the proportion of households headed by people aged 65 and older with housing costs of more than 30% of gross income has nearly doubled, from 5% to 9%, over the last 15 years. This is partly because more and more Australians are buying and paying off homes later in life due to price growth, said Eslake.

The sad reality is that many Aussies will never make it onto the property ladder, and will be trapped for life in the private rental market. This is worrisome because studies have shown renters will need more in savings than homeowners to ensure a comfortable retirement. 

According to a report released by the Association of Superannuation Funds of Australia (ASFA), couples who rent for life in the eight capital cities will need at least $1m to ensure a comfortable retirement. 

In Sydney, Australia’s most expensive housing market, a renting couple would require a lump sum of $1.16m upon retirement, almost double the $640,000 a couple who own their own home outright would need, according to ASFA.

Outright home ownership has declined, from 61.7% in 1996 to 46.7% in 2013-2014, Eslake said, citing official data from ABS.

“Compared to 15 years ago, when almost three out of five home owners owned their home outright, home owners with a mortgage are now in the majority,” he said. 

This is a serious threat to retirement balances, as renting and mortgage repayments later in life can dramatically drain income streams. To cope with rising housing expenses, more and more retirees will be forced to use large chunks of their superannuation to pay off the remainder of their mortgages, according to Eslake.

“In other words, there is a clear link between deteriorating housing affordability and the adequacy of Australia’s current retirement income stream,” Eslake said.


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