Australia's love affair with property is well known, but what is perhaps less well known is that it is starting to threaten the successful retirement of millions of Australians.
While on paper, Australia is one of the wealthiest nations as measured by a median household, a recent white paper has shown an astonishing concentration on property which underpins these figures.
Most of that household wealth is locked up in residential property—around $12 trillion—which is still much bigger than the $4.5 trillion held in the superannuation system.
Property rising much faster than wages
With property prices rising much faster than wages for a significant time, this has greatly complicated retirement because many Australians remain heavily in debt as they prepare to retire.
Figures from the Australian Bureau of Statistics show that total household assets now exceed $20 trillion, with that total dominated by housing (land and dwellings) at almost $12 trillion.
Lots of houses bring lots of debt
There is plenty of debt being held against these properties—$2.5 trillion, made up of $1.7 trillion in owner-occupier loans outstanding and about $800 billion in investment property debt.
The retirement issue is fairly obvious—you can’t eat your house, and that heavy concentration of wealth in illiquid non-financial assets is going to require a range of different solutions to meet cashflow obligations.
Government policies here are also, perhaps, partly to blame.
While a high super balance will reduce your age pension through the assets test, the family home does not affect your pension, regardless of its value.
There is also a gap between when super can be accessed at age 60 and when the age pension begins at age 67, providing a perverse incentive to pack as much value into the house as possible and fund housing loans and living expenses through tax-advantaged super before later claiming the pension as well.
However, the white paper prepared by wealth management adviser Lumisara makes it clear that there are also some other things happening to create the heavily indebted retiree.
It says that effectively one in every two homeowners aged 55 to 64 has outstanding housing debt versus fewer than one in six in 1990.
For those aged 65-plus, 15% of households now still have housing debt, more than double the rate from 1990.
These debts are quite large too, with the 55 to 64 pre-retiree cohort average housing debt balance now exceeding $230,000.
Equity mate meets divorce
One reason is house prices outpacing real income growth, but the increased rate of refinancing, the use of redraw facilities, and a rise in later-life relationship breakdowns have also played a part.
The 2020 Retirement Income Review showed that the mortgage debt-to-income ratio for borrowers aged 55 to 64 rose from 72% to 138% between 1990 and 2020 and the median age of loan extinguishment drifted from 52 in 1981 to 62 in 2016.
These trends have continued to grow and show no signs of reversing.
Delaying retirement
The main strategies indebted pre-retirees use to deal with their housing debt are to delay retirement until the debt is lowered or paid off, retire and continue to service the loan, or look to use another source of capital to pay down or extinguish the debt.
This is already happening with the average age of actual retirement rising from 57.4 years in 2004-05 to 61.4 years in 2022-23.
The ABS also finds the intended age of retirement today to be between 65 and 66, perhaps due to the higher age pension qualifying age but also perhaps partly due to housing debt.
Superannuation is undoubtedly being used to repay housing debt with the ABS finding that it accounted for more than one in every four super dollars withdrawn in 2022-23.
Obviously, this will reduce the income generating capacity of the remaining superannuation.
Interestingly, this means that while super balances are rising, many retirees may still risk being asset-rich but cash-poor and end up relying heavily on the Age Pension.
Accessing $3 trillion in homes
The Lumisara research found that given households over 65 are estimated to hold some $3 trillion in housing wealth, accessing some of that equity instead of using super to extinguish housing debt, could (depending on individual circumstances) result in improved retirement outcomes.
The home equity release market has already grown to more than $4 billion, split between the Government’s Home Equity Access Scheme and commercial reverse mortgage providers.
These products have also improved and now usually come with improved consumer protection measures including the No Negative Equity Guarantee and an insistence on independent legal and financial advice.
Five key retirement income sources
Lumisara said Australia’s retirement income system should now include five non-employment related potential sources of retirement cashflow, being:
. Age Pension
. Account-based Pension.
. Home Equity Release.
. Lifetime Income Streams.
. Non-super Investment Income
It was suggested that by using these five basic sources, the retirement system should be able to cater for a wide range of Australian households.
