It's possible to rent and retire well. But you need to sacrifice like a homeowner, writes Nigel Bowen.
Most of the commentary around housing affordability focuses on first timers struggling to get into the property market. But the sleeper issue is what’s going to happen when female renters with low super balances retire.
Today, most retirement standards are based on the assumption that people own their homes outright at the point of retirement. And your eligibility for the government’s aged pension does not consider the value of your home. In short, the retirement system is kind of set up for homeowners.
The problem is, for a growing number of young Australians, this is becoming a pipe dream. Among 18-to-39-year-olds, home ownership dropped to 25 per cent in 2014, down from 36 per cent in 2001, according to the 2017 Household, Income and Labour Dynamics in Australia (HILDA) survey.
With rents also increasing, this is having dire consequences for retirees, particularly for women who on average retire with way less super than men.
According to the St Vincent de Paul Society, the fastest growing group of homeless people are older women: some 59 per cent of Australians seeking help from homelessness services are women.
The majority of older women experience homelessness following separation, widowhood or domestic violence. These experiences also mean that women are more likely to experience poverty than men (15 per cent compared with 13 per cent).
“Many women spent long periods of time without regular employment while raising their children and as a result they have much less superannuation to draw on,” said Jack de Groot, CEO St Vincent de Paul Society NSW.
“They are also usually in lower paid jobs and now, as they face failing health, redundancy or retirement, they find they can no longer afford to pay escalating rents in the private rental market. These women struggle to keep a roof over their head.”
The key is to start as early as possible, putting a plan in place so you can either afford to pay rent in retirement or to buy a home without wiping out the majority of your super balance.
For those who aren’t going to have a paid-off family home to fall back on after exiting the workforce, there are basically three options: rentvesting, putting extra money into super or investing in shares.
An intractable problem
Taking a proactive approach is preferable to waiting for housing prices to fall. While an oversupply of apartments, interest-rate rises or a downturn may ‘correct’ high property prices in Australia’s east coast markets, experts aren’t hopeful for long-term change.
Personal financial expert Noel Whittaker, and Robert Snell, director of financial advice firm, Life Values, believe the housing-affordability situation is unlikely to improve much.
“It’s not just a Sydney-Melbourne problem, it’s a nationwide crisis,” Snell argues. “An affordable house is one that’s three times the median income. If you want to buy in Adelaide you’re still looking at six times the median income for the average property.”
“Australia doesn’t have one property market, it’s got a collection of them, some of which have gone down recently,” adds Whittaker. “But, with the population expected to almost double by 2050, that’s got to keep putting upwards pressure on prices.”
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Accepting the new reality
“There’s a brief window of opportunity to get into the property market between finishing your education and having kids,” Snell says. “Unless you’re a high-income earner or can access the bank of mum and dad, there’s not much scope to save for a deposit while covering rent and the costs of raising children.”
“If a couple is prepared to live frugally and be single-minded about saving they can probably still scrape together a deposit. But it’s undoubtedly a lot harder than it used to be,” says Whittaker.
Would-be homebuyers may be clinging to hope, and if their focus is strong enough that may bear fruit. But they should also plan for a financially sustainable life without buying property. Below, we outline three options.
Option 1: rentvesting
If you can’t buy a $2 million house in Brisbane, perhaps you can manage a $200,000 apartment in Launceston?
Snell says rentvesting – which is buying an investment property while continuing to rent – is something more Australians should consider.
“It’s not easy to explain how it works, but buying property, whether you live in it or not, allows you to build wealth quickly,” he says.
“Let’s say you saved up $10,000 and borrowed $90,000. You then bought a studio apartment in a regional town where real estate prices were rising 3 per cent a year. In 10 years, your flat will be worth $130,000. That means your $10,000 equity has increased to $40,000, assuming for the sake of simplicity you still owe $90,000. Good luck getting that kind of return on other types of investments.”
Whittaker is also a fan of rentvesting: “It’s an investment property, so you can negative gear it,” he says. “Plus, if you can arrange to live in the property for six months every six years, you don’t have to pay capital gains tax when you sell it.”
A growing number of women are taking the plunge and buying a property on their own, either to live in or as an investment property.
According to Aussie’s panel of 20 lenders, in 2015 only 1178 more individual males than individual females took out a home loan. Two years earlier that gap was more than 2000, while in 2012 it was more than 4000. In 2015, individual women submitted 11.2 per cent of all mortgage applications, just behind individual men, who submitted 12.3 per cent of applications.
Option 2: up your super contributions
“Super provides relatively safe and attractive returns, though given you can’t access your money until reaching preservation age, it’s best suited to the middle-aged,” Whittaker says.
“Let’s say you’re earning $80,000 and your employer is putting in around $8000. You can put another $17,000 in before reaching the $25,000 annual contribution cap.”
Snell likes that the returns you make on super are lightly taxed at 15 per cent.
“By upping your super contributions you’re essentially being subsidised by the government,” he says. “If your employer is putting $5000 a year into your super and you’re voluntarily contributing $20,000, around $8000 that would otherwise end up in the taxman’s hands each year is staying in your account. That money is then earning compound interest for however many decades there are until you retire.”
Option 3: build a share portfolio
“I don’t suggest people should try to pick winners, but index funds have averaged a 9 per cent return over the past 30 years,” Whittaker says.
“Unlike property, you don’t need to save $30,000 and borrow $600,000; you can invest in some index funds for as little as $500. It’s a liquid investment, so if you need $5000 to cover an unexpected medical bill, you can access some of your money. Also, given franking credits, the dividends you earn on your shares are nearly tax free.”
This option has been taken up by a growing number of young Australians.
According to the 2017 ASX Australian Investor Study, by Deloitte and the Australian Securities Exchange, the proportion of 18-24 year olds investing has doubled from 10 per cent to 20 per cent over the past five years.
And the proportion of 25-34 year olds has increased from 24 per cent to 39 per cent over the same period.
More men than women are investing, with the report showing 31 per cent of women, compared with 44 per cent of men, own shares or other listed investments.
Making a commitment
The good news is you can still enjoy a comfortable retirement without owning the home you live in, but to do that you have to make the same kind of sacrifices as those paying off a home.
“Financial independence is achievable,” agrees Snell. “However, you’ve got to be willing to make a serious, long-term commitment to investing a substantial proportion of your income. You’ve got to make a decision. Are you going to be a property owner and go for it? Or are you going to be renter? If you’re not going to have that forced savings of a property you’ve got to get stuck in and save for your retirement.”
The sooner you make a decision and act, the more likely your plan B is going to get you to the same place as plan A.