Baby Boomers, Retirement and Asset Prices

In this week’s post, I’ve undertaken a detailed analysis of one of the key macro factors I believe will exert significant downward pressure on Australian asset values, in particular housing, over the next decade: the retirement of the Baby Boomer generation.

But before I launch in, here’s an overview on what I have said previously about this issue on this blog.

A quick recap

I have touched on the impact that the Baby Boomer’s retirement would have on asset prices in previous posts, but never in great detail.

For example, in Bringing it Home (July 2010) I contended that the Baby Boomers were behind Australia’s infatuation with investment property speculation, which has driven demand (and prices) up for housing. I then claimed that the Baby Boomers would turn from net buyers to net sellers of investment properties once they entered retirement:

Investor appetite for housing began to grow in the 1990s as the Baby Boomer generation began to reach peak earnings age (45 to 55 years). They began buying up investment properties en masse as a way of both minimising their tax (via negative gearing) and ‘saving’ for retirement…But with the Baby Boomers soon to enter retirement, it follows that their appetite for investment properties will shrink, thereby removing one of the key demand-drivers of house price growth. Further, because higher investment yields can be earned by placing their funds in a bank term deposit than can be earned via rent, it is likely that many Baby Boomers will sell their property investments to fund their retirements. This process of property divestment is likely to accelerate once the Baby Boomers realise that there is little prospect of continued high capital appreciation…

And in Blowing Bubbles (May 2010), I argued that the Baby Boomers had also driven prices up for owner-occupied dwellings:

…The Baby Boomers reaching peak earnings age from 1990 is also likely to have significantly increased demand (and prices) for owner occupier homes, since many in this demographic would have traded-up to their most expensive (‘peak’) home over this period…

My hypothesis that the Baby Boomer’s impact on asset values would soon turn from positive to negative was then supported by a recent Bank for International Settlements (BIS) working paper, which examined how demographics are likely to affect asset prices, in particular housing, in 22 advanced nations over the next 40 years. I summarised this BIS study in August, the key finding of which is shown in the below chart:

According to the BIS, as the Baby Boomers reached working age and started buying housing from 1970, they helped to push-up property prices throughout the world. In Australia, over the past 40 years the Boomers increased real house prices by around 30% compared with what would have occurred had our age structure remained neutral. However, the ageing of the Baby Boomers is projected to reduce Australia’s real house price growth by around 30% over the next 40 years compared to neutral demographics. This is because the Baby Boomers will reduce their housing stock as they enter retirement by liquidating their investment property holdings and downsizing, thereby depressing house prices…

The Baby Boomer generation has had a similar impact on financial assets, such as bonds and shares… But, like for housing, financial asset prices are likely to come under pressure when the Baby Boomers retire and begin selling their assets to fund their retirement [Population Ageing is Bad News for the Housing Market, August 2010].

Finally, in CBA: Desperately Seeking Housing Affordability (September 2010), I cautioned against the increasing debt loads of the Baby Boomers, arguing that this increased debt could lead to selling pressure once they retire:

…The rise in debt levels of the older cohorts (over 55’s) is a significant risk to the housing market, since these people are approaching retirement and many will likely need to sell their housing investments or downsize in order to fund their lifestyles once they retire (putting downward pressure on prices).

Now for the detailed examination.

Australia’s population getting older:

Let’s start by examining Australia’s population pyramid (taken from here), which is similar, albeit younger, than other mature economies:

Australia’s population is ageing: according to the United Nations, the median age in Australia increased from 28 years in 1970 to 38 years in 2010. And Australia’s population will continue to age into the future, with the median age reaching 43 years by 2050 (see below table).

Now let’s turn to Australia’s Baby Boomer generation – defined by the Australian Bureau of Statistics (ABS) as those born between 1946 and 1965. This population cohort comprised around 5.6 million people at end-2009, or 25% of Australia’s population.

Some simple math tells us that next year, the oldest members of the Baby Boomer club turn 65, marking the traditional end of their working years, whilst the youngest Baby Boomers turn 46. In actual fact, however, many Baby Boomers will retire before 65 – around one-third of men and one-half of women – whilst a smaller proportion will continue to work beyond this age (see below chart).

Now consider these facts: according to the ABS, household income peaks between the ages of 45 and 54, before dropping sharply (see below chart).

At the same time, according to world famous demographer HS Dent, spending increases until age 46 and then begins to decline, whilst saving and debt repayments accelerate until the end of one’s working life (see below chart).

Putting these observations together produces a hypothesis of the Baby Boomer’s financial habits. That is, the oldest members of the Baby Boomers reached their peak earnings years (45 to 54) from around 1990. Over the next 20 years, as the younger members of this group followed, the Baby Boomers collectively moved into the wealth accumulation phase of their working lives, whereby they began investing heavily in houses (both owner-occupied and investment) and financial assets (e.g. shares and superannuation).

Now the first members of this group are entering the retirement phase, whereby assets will be divested or drawn-down to fund their lifestyles. This ‘draw-down’ phase will build over the coming decade as the younger members of the Baby Boomer cohort follow their older members into retirement.

Now let’s examine whether this hypothesis is supported by the data.

Household finances and net worth:

Let’s first consider Australian household’s total assets, split-out by housing and financial assets (e.g. shares, superannuation, cash and bonds). For the purpose of today’s article, I have ignored ‘consumer durables’ (e.g. cars, furniture and electronics) from this analysis since I do not consider them to be true assets (i.e. they typically do not appreciate in value and/or produce an income or imputed income).

You will notice from the above chart that the overwhelming majority of Australian household’s assets – 62% as at March 2010 – are held in property versus only 38% in financial assets.

However, not everyone owns their properties outright. In fact, there is around $1.1 trillion of mortgage debt supporting around $4 trillion of housing assets (see below chart).

As such, housing’s share of household net worth (household assets minus liabilities) is 54% (see below chart).

So the popular perception that Australians are obsessed with property is certainly supported by the aggregate data, which shows that just over half of household’s net worth is tied-up in housing.

Baby Boomer breakdown:

Now let’s turn to the Baby Boomers, starting first with property. The below chart shows the average property holdings by age group. Unfortunately, due to the glacial pace at which the ABS updates their data, the latest available information is for 2005/06 (i.e. four years old).

As you can see, Baby Boomer households – those in the 45-54 and 55-64 age groups – hold the highest proportion of housing assets, both owner-occupied and other (i.e. investment properties and holiday homes).

When mortgage debt is deducted and financial assets added to the equation, the older Baby Boomers – those aged 55-64 – hold the highest net worth (see below chart).

However, reflecting the fact that a small number of high net worth Boomers drags-up the average, the median (middle) Baby Boomer’s net worth is substantially less than the average (see below chart).

Finally, reflecting the difference between the median and average holdings, the below chart shows the Baby Boomer’s housing and financial net worth split-up by income quartile (i.e. poorest to richest) as well as the proportion of net worth held in property.

As you can see, the median (middle) Baby Boomer – those in the middle of the 2nd and 3rd quartiles – hold around two-thirds of their net worth in housing. Further, the median individual Boomer only held around $72,000 of financial assets in 2005 – certainly not enough to fund a decent retirement.

A pain in the assets:

Now having examined the household and individual financial position, let’s turn to the aggregates. The first chart shows the total percentage of housing assets held by each age group.

Despite representing only 25% of Australia’s population, the Baby Boomers collectively hold 45% of owner-occupied dwellings and 51% of other dwellings (i.e. investment properties and holiday homes). However, since the older Boomer cohort (55-64 year-olds) are relatively small (accounting for 11% of the population), they hold a smaller (20%) share of Australia’s housing assets. By contrast, the younger Boomers (45-54 year-olds) hold 26% of the housing assets, reflecting their larger (14%) share of the population.

It’s a similar story when it comes to financial assets, with the Baby Boomers holding 54% of the total (see below chart).

Why it matters:

The Baby Boomers, which represent one-quarter of Australia’s population and own one-half of the nation’s wealth are headed into retirement. With the oldest Boomer turning 65 in 2011, this shift to retirement officially begins next year, although many have/will retire before this age. This shift to retirement will gain strength throughout the decade as more and more Boomers exit the workforce.

Most Baby Boomers are heavily exposed to property and hold very little in the way of financial assets – certainly not enough to fund a comfortable retirement. It is, therefore, highly likely that many Baby Boomers will look to free-up the equity in their housing assets to finance their lifestyles. There are several ways to do this:

  1. sell investment properties and/or holiday homes – as shown above, the Baby Boomers hold half of the nation’s non owner-occupied homes; 
  2. Downsize – sell the large family home, buy a smaller/cheaper residence, and pocket the difference;
  3. Sell and rent; and
  4. A reverse mortgage – effectively a loan whereby the bank provides 40% of the home’s equity, with the principal and interest repayable upon the death of the mortgage holder or sale of  the residence.

Of these four options, I believe that the first and second – that is, the sale of investment properties/holiday homes and downsizing – will be the most commonly used by the Baby Boomers to free-up cash.

As shown in the below table, around 30% of Baby Boomers hold second homes and around 13% have loans over these properties.

Further, based on Australian Taxation Office (ATO) data, around 75% of property investors are middle-income earners and 70% are negatively geared – i.e. losing money and investing purely for capital gain (see below chart). Many of these negatively geared property investors would be Baby Boomers.

The Baby Boomer’s appetite for negatively geared investment properties, and their inflationary impact on house prices, has even been acknowledged by the RBA. For example, in a recent ABC Radio report, Deputy Governor, Ric Battellino, had this to say:

You see if you look at the composition of debt across the country, it is the higher income older generation that are driving the gearing up. And in the course of doing that, they’re crowding out the new entrants into the housing market.

As I have said previously, the Boomers will soon switch from net buyers to net sellers of investment property. Once they retire, many Baby Boomers will look to sell their property investments due to their low yields (around 3% after costs) and, in the case of Boomers that are negatively geared, the inability to claim tax deductions against other income once they cease working. The incentive to sell-out of their investment properties will intensify once the Boomers realise that there is little prospect of continued high capital appreciation.

Regarding the second option – downsizing – a recent survey of people aged over 60 found that 22% are “very likely” and a further 10% “likely” to sell their home and buy a smaller property to fund their retirements (see below chart). By contrast,there was very little support for my third and fourth options of selling and renting, and taking-out a reverse mortgage.

Selling an expensive home and buying a cheaper home will put downward pressure on house prices, particularly large family homes. The impact is akin to the effect that selling $1 billion of BHP shares and buying $500 million of Rio shares has on the ASX 200 share index – i.e. it drags it down.

Why the mainstream are wrong:

 Most mainstream economists and property ‘experts’ do not accept that changing demographics will adversely affect Australia’s asset values, in particular housing. In the case of housing, they instead espouse Australia’s strong ‘underlying’ or ‘pent-up’ demand, arguing that projected high rates of growth in the 25 to 34 year age bracket will lead to high rates of household formation and, therefore, continued house price appreciation.

In their recent housing report, Westpac focuses on the projected growth in the first home owner age group but ignores the rapid projected growth of the 65+ age group. Yet it is this group (the Baby Boomers) that holds nearly half of Australia’s housing assets and it is they that will reduce their asset holdings over time to fund their retirements, depressing prices. It is also the Baby Boomers that accounted for much of the growth in housing values over the past two decades as they reached peak earnings age (45-64) and accumulated significant real estate holdings over this period.

In any event, underlying demand is a poor predictor of house price growth. In 2006, at the height of the Californian housing bubble, strong underlying demand and housing shortages were being espoused as a reason for continued house price growth. Prices in California have fallen more than 30% since. Similarly, in June this year, a US real estate economist released analysis suggesting the USA is “not building enough homes to keep up with potential demand… This pent-up demand could get unleashed on unprepared markets, causing shortages and rising local prices”. Yet sales and prices are still falling and will remain depressed for years to come.

Make no mistake, the shift of the Baby Boomers from the wealth accumulation phase into the draw-down phase will put lasting downward pressure on asset prices, just like the BIS said. So-called strong underlying demand from 25-34 year-olds is highly unlikely to offset this effect.

Cheers Leith

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. Great insights here, Leith.

    The ageing population is certainly the big sleeper issue for financial markets and politics alike. I think the great difficulty has always been in quantifying exactly how significant the impact is going to be, but the info above helps puts things in perspective.

    I read Dent's book "The Great Depression Ahead" earlier this year… Very interesting stuff! And, as gloomy as it is, his logic sounds spot on.

  2. financialinsights

    Great stuff man! I've argued that Canada is in a similar position. I found it difficult to dig up the same high quality information about net worth by demographics that you managed to.

    Nicely done!

    -Ben

  3. Hi

    I think you're on the button with this one. Time will tell. However your evidence supports your hypothesis well (not to mention makes intuitive sence).

    I suspect that other groups knew this and attempted to hit the turbo button on the economy back in the Howard daze with attempts to bring in a large younger population who will keep the ball rolling.

    We will eventually have to get past the boom period and consolidate, but I believe that greedy people have attempted to push that past their retirement period.

    Of course the longer you fall the harder you land, perhaps they're hoping to pull their chute before hitting the ground. But like every good Ponzi scheme someone will hit hard.

  4. adventureretirement.com

    Yes, I quite agree. Retiring boomers will exert significant downward pressure on the prices of homes — particularly larger homes — for quite some time. Perhaps for as long as twenty or twenty-five years. Bill

  5. Great stuff Leith, always a refreshing contrast to the bullish mainstream media.

    One thing that I am very curious about is the supposed housing shortage in Australia. Have you previously undertaken a detailed breakdown of the stats surrounding this? If not, I'd be very interested to hear your take on it!

    Cheers,

    Ash

  6. Wow. You have proved there could not possibly be any shortage of housing. It is all the boomers' fault.
    I thought it had something to do with high immigration and failure to expand the rail network. Now I understand it is boomers buying holiday houses.

  7. Leith – I have forwarded your link to many of my friends, here is my email verbatim that went with it.

    Here’s about the best summary I have seen on what is unfolding in the housing market. I reckon housing won’t increase in value until around 2020-2025 (relative to today’s prices) – as I have stated many many times when I have spoken publically. Now the tricky part is in working out the bottom of the fall, it will happen well before 2020 in my view, maybe as early as 2014/2015 once the selling/panic sets in, then again I reckon we are in for a long drawn out “death by a thousand swords” after the initial fall (as the US is about to experience), so I am guessing 2016/18 for Australia (the US looks like it is leading this “cleansing process”). LOL … remember this is only my view!

    Interestingly, given 1962 marks the peak of births in the western world (when contraception turned up), add 50 years, you get 2012, so we are sort of near the last of the Baby Boomers hitting peak spending … right? … so they should all be done with selling their investment properties – right? Not so, they are so use to capital appreciation (bit like a drug) that they are hanging on … in the false belief that prices will hold up, maybe go further up. Aaaaah – you have to be joking! What it means to me is that there is PENT UP SELLING DEMAND that is about to turn up …ie: once the message gets to the herd, the fall will be quick … and that fall has already occurred in the US and Europe. Now add the cry for land release/new home starts increasing supply and the rise in interest rates … this is a bubble just waiting to be pricked! When China stops, we will stop with it – so unemployment will exacerbate the fall.

    In my view, the stage is set for the curtain call (read fall).

    Phil

  8. FInancial Follies

    This is a fantastically researched post. Purely anecdotally, my father who has just retired recently told me he has been advised to sell all his investment properties. Multiply that by the thousands and…

  9. Real demographic change always makes impact on economy, but change in moral values of a generation has even more impact. Baby boomer generation regards houses, their parents that lived during great depression valued more land and small business, their kids apprise durable goods and money (time).

    It's psychology that drives asset (real estate and any other) bubbles.

    The best example how psychology affects house prices is comparison between UK and Germany. Very similar countries, with the same age structure but while average British has 2/3 or more of wealth in real estate, average German has 2/3 or more of wealth in liquid assets and durable goods (cars). As a consequence housing in UK is twice as expensive as in Germany.

    Once new generations start carry out their own dreams, real estate is destined to remain down for a long time until some new generation come that shares dreams of baby boomers.

  10. Nice post.

    I have one point however to raise – you note the median age in Australia is now 38 ,up from 28 in 1970. I would argue that using the median age distorts conclusions regarding the ageing of Australia – a fair amount of that increase would be attributable to the increased longevity of Australians, not simply due to the greater ageing of Australians – though of course this would play a role.

    I tried to find out but was unable to, but what is that average age in Australia? How has it changed since 1970? I think that would give you a better idea of the extent of the ageing problem in Australia. Not to say that the rest of your analysis is flawed or incorrect, I agree with pretty much all of it.

    Rgds
    Justin

  11. Good piece as usual.
    The counter argument goes like this. The boomers want to keep their big homes, they don't want to downsize to smaller homes or townhouses / apartments.
    Of course some will be able to maintain that. But as you allude to Leith, whilst they may WANT that, its another question as to whether they can MAINTAIN that when they do finally retire, especially as they will want to maintain the consumerist boomer lifesyle…..

    The other common counter is that boomers will work later than the elderly of the past. I find that a little unconvincing too. Sure some will, and probably more WILL work later in life. But there will still be many who DO want to retire at 65, or earlier. Not everyone loves their work! Also, although the boomers will be healthier than the aged of the past, many of course will still succumb to age related disease. They are not invinceable!!!
    Having said that, I don't personally believe this will have a MAJOR impact on house prices. I DO think however it will place some downward pressure.

  12. Hi Leith,
    I've started reading your posts and think they are brilliant – clear, logical and well-supported. Thank you. I am just wondering, does this mean if people (Australians) are targeting decent returns (disregarding for a moment lifestyle considerations) that you think they should rent rather than buy? Do you, if you don't mind me asking? What asset class do you think a 30-something couple should invest in for the best prospective investment returns? I guess Aussie property is (mostly) a no-go area. So, what? Shares (avoiding banks since the outlook for the housing sector is weak)? Or bank deposit? I realise this blog is not about providing investment advice, but what you write makes a good deal of sense and I would be very appreciative of your general comments about this, recognising that people need to consider their personal circumstances and get individual advice when looking to invest… Thanks and cheers..

  13. There must also be an effect from inherited assets since taxes on inheritance are zero or negligible.
    Any comments on how the above may be affected by deaths of asset rich parents of BBs?

  14. On inheritances, I am in that exact situation right now, of course my psychology is different to the average Jo Schmo out there (right now) – we have sold it in the last couple of weeks, reducing the price by 17K to get the sale through … without conditions/strings attached and 60 day settlement.

    The point is two fold, firstly people will sell as soon as they get the sniff that prices are coming done (and will not recover for a very long time). The second and less obvious point is that the supply/demand curve is incredibly fickle – you don't need a large shift to create the conditions where there is an over supply of properties on the market – MLB docklands and the Gold Coast are 2 classic examples, real estate agents (in my view) have colluded for many years to hold the market together … creating an "orderly" process of selling apartments (and homes). Across the board this will be impossible to do.

    The other important bit of information is what will we do with the dough … and the answer is simple, not in property or shares, it will be cash and Commonwealth Government bonds. You see the average age of someone coming into this type of money (average age well over 50 as the average age of death is over 80) will be to take less risk, retirement beckons and risk is contained/managed for the benefit of future generations within the family. And don't forget that this age demographic will have been through their peak earnings (income)… they are the ones being tossed out of organisations (too expensive middle management), replaced through reorganisations … less expensive … younger people.

    Having said all that, a third of all properties are owned, a third rented and a third under mortgage (roughly speaking) – it is easy to guess that the majority of properties owned outright belong to ageing baby boomers (in my view they have had it easier than any generation in history). The next generation who receives the dough will think twice about holding onto property (or reinvesting as to get the tax benefit because the home must be sold within 2 years). The next generation will likely pay off their own mortgage and be conservative if there is anything left over (remember there are usually 2 or 3 off spring that it must be divided into …).

    In my mind, given that the house has to be sold for the tax benefit, given the split across multiple children, given a falling market, given the recipients peak earning days are over, yarda yarda yarda, I can see a wind shift (and a fast one based on the US experience) as soon as the supply/demand curve flips to the downside.

    Phil

  15. Leith – the period of expansion in the western world was as a direct result of those born from 1933 to 1962 forward projected by their predictable spending patterns/lifecycles (peaking 44-47 years of age, 44 for those born 1933 and 47 for those born in 1962). Between 1933 and 1962 there was 30 years of increases in the birth rate at 45 degrees no less (period of expansion from the late 70’s to the late 2000’s) – followed by a 13 year period of falling birth rates 1962 through to 1975 at the same rate in reverse because of the pill/contraception (X gen on the way down and then Y gen on the way back up).
    The traditional dates of 1946 through to 1964 are only part of the period of expansion. Of course the end of peak consumption/GDP is about the same whichever dates you use, give or take a couple of years– ie about now! We are over peak consumption/GDP in the western world. And the western world consumes about 60-70% of everything so the rest of the world does not have a hope of filling the gap. It’s a mess whichever way you look at it.
    It is this group of people (born 1933 to 1962) that will continue to dominate what happens – whether it be shares, property or who governs. This is the group of people who have never had it easier. Unfortunately they will continue to dominate, specifically who governs until they are dead and buried. Sheesh and I am one of them by the way!! Just watch the laws change to support these people in their later years – their final cards to play out, health, welfare, food?? I suspect our own home will come out of escrow and be taxed someway – it will certainly be withdrawn from numerous exemptions in asset tests in the future!! Look out!! Maybe Super will be raided to pay for this generations last hoorah.
    Interestingly it is 78 years of age on average when people start selling their houses on mass (think 90 degrees – straight up, it is frightening). People either die, move into a nursing home or move in with a sibling – 1933 plus 78 is about now. That means an ever increasing supply of houses for sale for the next 30 years.
    So with “baby boomers” selling assets to fund retirement and living styles (many have been “under employed” – read earn less as large organizations spit them out once they hit 50 years of age to reduce costs), the wave of earlier generation born from 1933 and consumer confidence down the toilet (read the rest), we are in for a horrid decade and beyond.
    Cash and bonds look good to me.
    Phil

  16. @anon 7:48 – don't the Greens have some sort of inheritance tax on their policy books – wonder if they will 'encourage' Gillard to put it to parliament.

  17. Those born in 1960 or after, have a retirement age of 67.

    If they want to retire before then and are in comparatively good health and have assets that do not allow them to qualify for the aged pension (you can take a reduced aged pension from 60 onwards) they will need to fund their own retirement. Wage increases also affect super if they are taking a superannuation pension…some of the older boomers seeking early retirement in my workplace have delayed their retirement for that reason…and I assume that this will continue.

    Those Boomers in the 45 to 51 group have another 16 to 22 years before retiring if they wish to access their superannuation. They are likely to optimistically purchase the older boomers properties in order to fund an earlier retirement…perhaps 58 or 60. However, it is likely that they will try to retire at 67 in order to maximise their retirement income as the costs of aged care become the bubble that replaces housing.

    This is the cohort that already holds 26% of housing assets.

    I think it will be a staggered downward creep in housing values over 30 years for larger homes and a staggered increase in housing values for smaller housing in higher facility areas (which we're already seeing). Xs and Ys and millenials won't be able to afford them or want them even at record low prices. They'll be too heavily taxed in order to pay for aged care and facing diminishing super. Banks won't lend. Low interest won't matter.

  18. We recently rented a 3br house on the Lower North Shore. My calculations are that our rent is roughly $1,000 a week less than on a mortgage of 80% of the current property value. On the weekend our landlord showed up completely out of the blue, he was 'in the neighbourhood' on a drive by and thought he would check the place out. During our friendly chat it turns out he has recently turned 60 and has 4 investment properties in the area as part of his super fund. Reading between the lines he will adding 4 investment properties to the market pretty soon to feather the retirement nest. Just another tale of a boomer with some property to tip into an already overcrowded under selling market.

  19. Great article Leith, and I have used it in my own blog (with all due references back to you of course!), at http://www.blog-findmyretirementhome.com.au.
    What are your thoughts about the same dynamics applying to the thousands of SME business owners who are baby boomers and also looking to exit in the next decade or so? You know, that well-worn path of ex-public servants cashing in their super on a Muffin Break franchise or similar?

  20. Leith van Onselen

    Hi Richard. I'm glad you liked the article. I think the impact would be similar for the SME businesses owned by the Baby Boomers. That is, many will look to exit over the next decade or so as they enter retirement.