As the baby boomers stay put in their family homes, governments are left with the twin headaches of a lack of affordable housing and a younger generation shut out of an expensive market.
The Frank Sinatra hit My Way could have been penned just for the baby boomers.
True to their reputation, those born between 1946 and 1964 are doing it their way, defying expectations as they age to leave their large family homes and downsize to smaller houses or apartments.
For countries including Australia, the US and the UK, this is creating a headache. Governments want older citizens to sell their houses and free up larger allotments in middle-ring suburbs for development. The aim is to create cheaper, medium-density housing for younger generations who are paying the price for a housing affordability and supply crisis.
Baby boomers, however, are not playing the game and appear content to stay in their family homes. A December 2015 report by the Productivity Commission, an Australian Government policy advisory body, indicates that only about one in five older Australians have sold their property and bought a less expensive home since turning 50.
Reports from organisations such as mortgage investor Freddie Mac and real estate website Trulia in the US, and research think tank Resolution Foundation in the UK, show this reluctance to move is not confined to Australian retirees.
Baby boomer home bodies
Why are baby boomers so reluctant to move? Matthew Kidman, principal and portfolio manager at Centennial Asset Management, says two key changes have occurred since baby boomers first entered the job market in the 1960s.
First, many people are starting their families at a much older age and, accordingly, are not seeking an independent household until their 30s. Second, today’s 50-plus-year-olds expect to stay employed for much longer and are content to carry the burden of a mortgage for longer than their predecessors.
“They also know that there’s a superannuation cheque coming to them when they do retire,” Kidman says. “They can get that lump sum and pay off their mortgage, and still pick up an aged pension.”
With no capital gains tax to pay on the family home in Australia, it represents a great investment for baby boomers. When they die, their children can sell the property and share the inheritance.
“Keeping the family home ticks all the boxes,” says Kidman.
Baby boomers are typically fitter than seniors have ever been in their 60s and 70s, and many of them are still able to take care of their homes and gardens (with assistance from a growing army of service providers). They also love their TV rooms, home offices, pools and entertaining areas. For some, even if they wanted to downsize, there is a lack of suitable housing available in desirable areas.
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Family and friends are a focal point for baby boomers, says property market expert Roger Montgomery, chief investment officer at Montgomery Investment Management.
“We know they don’t want to leave their community,” he says. “They are not willing in large numbers to migrate away from their social networks.”
The upshot is a scenario in which many baby boomers are cash poor but have become asset rich on the back of soaring house prices, while younger generations have been locked out of the property market. Australian governments have resisted policy levers that could reduce property prices, such as removing or reducing tax incentives for investors, for fear of a voter backlash from older citizens.
“When you try to make property more affordable by handing people a cheque – and by [first home buyers] not paying stamp duty that’s effectively what you’re doing – then all that happens is that house prices go up by that difference,” Montgomery says. And as those property prices balloon even further, the only people who can afford to buy are still baby boomers.
In the UK, the government’s Help to Buy mortgage guarantee scheme – designed to help first-home buyers purchase residential properties – has come under pressure amid concerns construction companies have been the big winners, while American policymakers have been criticised for not loosening land-use restrictions that make it hard to build new housing in high-cost cities.
The high costs of downsizing
The Productivity Commission concedes there is a lack of affordable downsizing options for older Australians, partly because of the financial costs incurred in property transactions and inconsistencies with state and territory land-planning regimes.
Erika Altmann, an urban sociology researcher at the University of Tasmania, believes high transfer costs are a critical factor behind baby boomers’ reluctance to downsize. They often face a double-whammy: when they sell a house they get hit with real estate and legal fees, and when they buy a new property they pay stamp duty plus another round of legal fees. For major cities such as Melbourne and Sydney, she says these costs are likely to exceed A$70,000.
Problems in aged-care facilities and retirement villages, including exorbitant exit fees and mistreatment of some residents, have also convinced many retirees to remain in their houses and access in-home care.
“[Such matters] need to be sorted out, and certainly the negative headlines around aged-care centres don’t help,” says Altmann.
At the same time, she says many baby boomers want to downsize but simply cannot find appropriate alternative properties. Australia has become a land of massive McMansions and small one- and two-bedroom apartments, with little in between. This missing middle is being ignored by property developers, especially in the middle-ring suburbs of major cities.
“It’s time for developers to step up and start to fill that missing middle that would encourage people to move,” Altmann says.
Baby boomer housing: a global dilemma
The baby-boomer housing issue is one that is testing the minds of policymakers around the world, including in the US. Research from mortgage investor Freddie Mac reveals that boomers and other home owners aged 55 and above control almost two-thirds of America’s home equity – about US$8 trillion.
In the Freddie Mac 55+ Survey of about 4900 home owners born before 1961, most indicate that they are “very satisfied” with their current homes (64 per cent) and their communities (59 per cent); significantly, 63 per cent prefer to age in place rather than sell their homes.
To boost the supply of available housing, the US has “slowly gone inland”, says Kidman, promoting the development of regional cities outside population strongholds such as New York, Los Angeles and Chicago. He says it is an option that is largely not available in Australia, excluding the national capital, Canberra, and larger regional centres such as Toowoomba in Queensland and Albury in New South Wales.
“Keeping the family home ticks all the boxes.” Matthew Kidman, Centennial Asset Management
“Australia can’t do it as much because if you go 500 miles from the coast the land is crappy,” he says. In any case, Kidman adds, such a strategy would require some extensive government planning, similar to the five-year plans that have run in China.
China, for its part, has been developing rural cities through a policy of chengzhenhua, or townification, where small rural towns are being transformed into urban centres. The policy first surfaced in 2007, but was re-emphasised by the central government in 2012.
While Chinese seniors may not be as cashed up as their Western counterparts, they are part of a population crush that requires a policy response. The chengzhenhua system is expected to drive a massive shift of Chinese seniors into smaller cities during the next decade.
In the UK, debate is also raging about housing inequity, with the Resolution Foundation think tank finding that baby boomers have been the chief beneficiaries of a UK£2.3 trillion windfall for people fortunate enough to own their own homes during the property boom of the 1990s and early 2000s. Younger generations, by contrast, are facing the prospect of lower living standards.
The Resolution Foundation’s Home Affront: Housing across the generations report, from September 2017, revealed that millennials are spending three times as much of their income on housing than their grandparents. That means they have less money to spend on other things.
Spreading the wealth: no easy policy fixes
John Daley, chief executive of Australian public policy at the Grattan Institute, agrees that greater regionalisation of Australia is one valid way to improve housing supply and deal with the stay-at-home tendencies of retirees. He also endorses developing transport corridors and subdividing land in middle-ring suburbs to open the way for more townhouses and apartment developments of four to six storeys along major routes.
“Every time you do that, you increase the density of the plot of land by a factor of four to six,” Daley says. “If you keep doing that, you get a big impact.”
Anecdotal evidence suggests many Australian baby boomers have most of their wealth tied up in the family home and relatively little in superannuation. They need to find some way to unlock that wealth; for example, through reverse mortgages or equity release schemes.
In the low-interest-rate environment of the past decade, there has been a low take-up of reverse mortgages, a form of home loan that allows borrowers to use the equity in their home as security.
An equity release is a variation on this idea: a retiree can sell a share of their house to a finance provider, and continue to live in the property rent free. When the property is eventually sold, the home owner shares the funds with the financier.
The Australian Government is encouraging older property owners to downsize through a federal budget initiative to start from 1 July 2018. Home owners aged 65 and over who sell a home they have lived in for 10 or more years will be able to make a non-concessional contribution of up to A$300,000 into their superannuation from the proceeds of the sale. The rationale is that if the baby boomers sell, it frees up larger homes and housing stock for younger families to upgrade.
However, CPA Australia head of policy, Paul Drum, says the scheme is “largely tokenistic”. He adds, “The biggest downside to this measure that will curtail its use is that [the A$300,000] is not exempt from the assets test for the age pension.”
This means anyone who is getting a full pension or who is in the mix to receive a full or part pension may lose out.
“The sums may not add up for them,” Drum says.
Figures from Australia’s 2016 census confirm that in the past five years home ownership rates have slipped among all age groups, except for those aged over 65. Even Australians aged 35-39 have seen a drop in home ownership, down from 61 per cent in the 2011 census to 58 per cent in 2015. For those aged 65 and over, home ownership rates are above 80 per cent.
“They don’t want to leave their community. They are not willing in large numbers to migrate away from their social networks.” Roger Montgomery, Montgomery Investment Management
This has a stark impact on wealth, says Daley. “
Today’s households headed by 65-74-year-olds are almost A$500,000 richer on average than households of that age 12 years ago. Households headed by 45-54-year-olds are A$400,000 richer,” he wrote with Danielle Wood in The Age.
“But this economic progress has not extended to Australia’s young. Households headed by 25-34-year-olds are only A$40,000 richer than households of that age 12 years ago.”
Making housing more affordable, and spreading that wealth around, is no easy fix. Even reforming negative gearing and capital gains tax on investment properties would drop property prices in Australia by only 2 per cent, according to Grattan Institute analysis.
What’s really needed is for developers to build that missing middle, and for policymakers to do more to encourage baby boomers to downsize. Achieving that is the key to putting affordable roofs over everyone’s heads.
Downsizers reluctant to move too far
At least 11 per cent of Australians are living in houses with more than two spare bedrooms, says the Grattan Institute’s John Daley.
“There’s no question that a substantial number of people are not downsizing,” he says.
Why not? Citing research by the Australian Housing and Urban Research Institute and the Productivity Commission, Daley argues that freeing up cash is not the major driver for a potential move. Rather, it is that older home owners can no longer get up and down stairs, their property is too big to clean and the garden duties are too onerous.
Nevertheless, retirees resist downsizing because they want to stay in their communities.
“That’s where all their friends are, they know the pharmacist, the doctor and how to get around. You can understand why moving 15 kilometres away at that point in life is not very attractive,” says Daley.
“The irony is that, by and large, the reason there’s little medium-density housing in those suburbs is that those very same baby boomers have been very busy objecting to every medium-density development in their suburb for the last 30 years.”
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