27/07/2004 - 22:00

Property’s role in self-funded retirement

27/07/2004 - 22:00


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Property’s role in self-funded retirement

The economic implications of an ageing Australia are of such concern to the Federal Government that it has recently asked the Productivity Commission to undertake an enquiry into the issue. Likewise, the debate on self-funded retirement in Australia is one of the most active on the political agenda. 

All major political parties have produced policies in relation to an ageing Australia and self-funded retirement. All are committed to self-funded retirement, in order to reduce reliance on government welfare funding (including public housing) and to maximise quality of life for older Australians.

The age pension, super-annuation funds collected compulsorily through the superannuation guarantee, and private savings are seen as the cornerstones of self-funded retirement. These arrangements are similar to those in most OECD countries.

Although home ownership is implicit in the debate, the Real Estate Institute of Australia (REIA) is concerned that home ownership has not been clearly articulated as an essential for self-funded retirement.

Self-funded retirement assumes home ownership. It can only be achieved through adequate superannuation provisions combined with an owner-occupied home in retirement.  Without full ownership of a home, a retiree would need a superannuation fund of $200,000 yielding 5 per cent per year to pay for a modest rent of $200/week.

Private savings are achieved through wealth creation strategies. Wealth gives people financial freedom and the ability to make life-style choices, including self-funded retirement.  Individual wealth reduces the need for, and reliance on, a range of government financial assistance programs. 

Any investment portfolio should be balanced with a range of different investments to spread the inevitable risks associated with achieving future earnings. This is particularly significant when developing a savings strategy for retirement, given that superannuation funds invest heavily in the share market.   Consideration should be given to investment property ownership in developing a savings strategy for retirement and building a balanced investment portfolio.

While all political parties recognise the importance of home ownership, the reality is that home ownership is declining and first-home buyers are about half of the historical average.

Housing affordability is now at its lowest since 1995. Home ownership in terms of owner-occupied dwellings fell from 69 per cent in 1986 to 67 per cent in 2001. A CEDA report in 2001 showed that home ownership for 25-34 year olds dropped 10 per cent from 1981 to 1996. A NATSEM report in 2003 showed that home ownership for 25-39 year olds dropped from 64 per cent in 1989 to 54 per cent in 1999.  First home ownership as a proportion of total home buyers financed fell to 12.7 per cent in February 2004 compared with annual averages in the range 20-25 per cent in the past 10 years.

The decline in home ownership substantially increases the reliance on rental properties that do not provide any equity for the tenant.   Postponing the purchase of a home until later in life means retirees increasingly will be paying mortgages. And increasingly, retirees are assuming reverse mortgages so that they can help their children purchase homes, further diminishing their estates.

This augurs badly for the future impost on government social welfare and housing budgets.

A coherent, nation-wide housing policy is needed, one which brings together economic and social imperatives to ensure that Australians will continue to be able to afford their own homes, both during their working years and in their retirement.

Plunging housing affordability caused by impediments such as property taxes and land supply – and barriers to wealth creation including land tax and State-level capital gains tax such as the NSW vendor tax – must be firmly on the agenda for review. The REIA welcomes some recent initiatives by State governments to provide stamp duty concessions for first-home buyers. We encourage State governments to also consider incentives for self-funded retirement, such as a once-only stamp duty exemption for retirees who sell their family home to buy a down-sized home for retirement.

Negative gearing is an important incentive for investment and wealth creation, which contributes in large part to superannuation and self-funded retirement. This is particularly useful for small investors who do not have large amounts of capital to invest, but who may enter the investment market by gearing against equity in the family home.

Cash flow is always needed to sustain the investment with a mortgage and Capital Gains Tax (CGT) is applied to the profit when a property is sold, counter-balancing what some see as an overly favourable tax regime for investors. 

Home ownership and an environment in which small investors can create wealth for their retirement years produce a range of social benefits that will reduce the burden on government pensions and welfare, including aged-care infrastructure.

Home ownership is an essential pillar of self-funded retirement.

Without it, most Australians will need many more superannuation dollars than they can currently aspire to, just in order to keep a roof over their heads.


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