Our ageing population threatens Australia with unsustainable debt.
But before I discuss this, let’s see what’s happening in our property markets:
In Table 1, below I present the growth rates and other statistics for our housing markets across Australia.
The Sydney property market is continuing in its ‘boom’ growth path.
The median value of all houses in Sydney is now a staggering $911,500.
Growth in dollars for the month was $11,000.
Sydney home owners are doing well, but how can young people save at a rate that keeps up with property growth rates?
The trend data, as shown in Graph 1, does not seem to point to any slowing in this market.
The current trend is not what we had expected and is probably a consequence of the expected lower interest rate environment.
Rental yields in both Sydney and Melbourne are falling away as the increase in values outstrips dollar weekly rental growth.
The yields in both cities are becoming unattractive and will sooner or later cause investors to slow their investment activity as some purchases become uneconomical.
The market is patchy and while Sydney is ‘booming’, Darwin is shedding value.
This is a consequence of it being in the midst of economic slowing as the wet season slows activity and some resource projects also slow.
This will be my last newsletter to all of you as I will move to the next part of my life mid next month.
I have enjoyed my discussions with a large number of you and trust that I have helped many in their endeavours to improve their personal wealth.
It’s hard to believe that when I started analysing the property market, the median value of a Sydney house was in the order of $175,000 – a huge difference to today’s median value of $911,500 (the average per annum rate of growth over the last 25 years has been 6.8 per cent).
In case you were wondering, I am not leaving to retire.
It is clear that this has to happen for the good of our country.
The word retirement doesn’t sit well with my fertile mind, but it does make me think of an issue that is very topical: how do we help to make people independent in retirement and less reliant on the government pension?
Unless we do, there is a real risk that the standard of living of our aged, and all of us generally, will reduce.
This is because government can’t spend more than it receives forever.
(That is, unless we all want a situation like the one that exists in Greece).
The family home is, in most cases, the largest valued asset that is held by many retired people
It is not fully utilised and in reality most do not need the space it provides.
If you can afford to live without any help then why not just continue to live where you have lived for most of your life and enjoy it?
However, if you can’t afford to live in the dwelling without government help then rational economics would suggest it should be sold and you should move to a home which is more in accord with your financial position.
My statement is harsh…
But it is the reality and we would all do exactly as I have stated if Government wasn’t there to support us in our old age.
Notwithstanding the economic rationalism, socially and politically it is very difficult to make a change and remove something that has been previously allowed.
For decades, people planned for retirement based on an assumption that they would never have to sell their home.
They paid taxes, and accepted those taxes on the basis that in old age, the government would support them and never have regard for the value of the family home.
Yet the reality is that we can’t continue as we have
We have to find a solution.
So for what it is worth, here is what I believe Government should do:
- Include the value of the family home in the means test when identifying the right to any pension or part there of. The value of the family home included should be that amount which exceeds say $400,000;
- Allow any person to contribute up to $2 million into their super fund where such funds are generated from the sale of the family home and the person is over the age of 60 years;
- The ability to contribute to the super fund should be a once off entitlement and have no tests other than those in the above point. It should be allowed, even where the person is receiving a pension from their super fund.
There is a significant amount of discussion currently around the right of people to contribute more than is realistically needed into super simply for real estate planning.
That discussion is soundly based given the large cost this potentially has on tax revenue when government is struggling to reduce debt and balance the budget.
In reality, even if we retire at say, 60 years most of us don’t need to support ourselves for more than about another 30 years. So how much do we really need in our super fund?
If we assume inflation at a rate of say 2%, and today we are happy that we can comfortably live on $70,000 per year after tax, then we would need to have a fund today of approximately $2.06 million.
This assumes our fund has a growth rate equal to the inflation rate only. Clearly, our fund should be able to do better than this.
On the above basis, it does appear reasonable that the government should limit the size of the tax free status retirement fund to something in the order of say $2.5 million.
Given all of the above it seems to me that a reasonable and acceptable solution is to encourage home downsizing and at the same time alter the super fund rules so funds have a limit of $2.5 million.
At the same time, people downsizing should be allowed to make a contribution of up to $2 million to their fund.
The consequence for all is a win
For people downsizing:
- They will still be able to live in a home they own;
- They will no longer have a tax liability on earnings being generated off the sale proceeds of the family home;
- They will not have to enter into reverse mortgages which have a high interest cost and have the potential to reduce the value of their asset by an unknown amount when it is sold; and
- Their prior, non-income earning home will start to produce income, tax free and enhance their lifestyle.
For Government, the cost of the current Super Fund arrangements, and the amount spent on pensions, will be reduced.
Those who contribute funds to their super as a consequence of the sale of the family home will, in all probability, require much lower levels of support.
Perhaps as an additional benefit, state governments across the nation might consider removing conveyancing duty where a person over the age of 60 sells their family home and buys a lower cost property and contributes surplus funds to their super fund.
Perhaps all of the above is wishful thinking but I hope for the sake of all it isn’t.
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