Will aged care exacerbate the baby boomer bust?

Yesterday, Fairfax published an interesting article, Sell the family home: PM’s aged care shake-up, which highlights one of the key longer-term challenges facing the Australian housing market: the impending retirement of the baby boomers.

JULIA GILLARD will prepare the ground today for the biggest shake-up of aged care in decades with a speech calling for a more sustainable and flexible system to cope over the long term with the rapidly ageing population.

The Prime Minister will say Australia is about to have two senior generations – retired baby boomers and their parents – and she will point to the release next Monday of a major report by the Productivity Commission which is expected to recommend controversial measures to keep aged care sustainable.

These include selling the family home to use as a bond when moving into aged care.

The Herald understands the commission finds the cost of aged care is discouraging much-needed new investment in the sector to provide for the increase in the elderly population as baby boomers begin to retire.

Consequently, the cost of aged care will need to increase to create incentive to provide services. The commission is expected to recommend a raft of measures which include selling the family home to provide a bond, borrowing against the value of the home to pay a bond, or making periodic payments. In each case, a bond would be returned to the next of kin when the aged care resident passes away.

The retirement of the baby boomer generation, and the associated selling-down of their assets to fund retirement, is a topic that has received significant attention on this blog (for example, see here & here).

In a nutshell, the past 40 years has been a golden era for the housing market in Australia as the large baby boomer cohort – defined by the Australian Bureau of Statistics (ABS) as those born between 1946 and 1965 and comprising 25% of Australia’s population – first moved into home ownership en masse and more recently undertook large-scale purchases of investment properties and holiday homes as they reached peak earnings age of 45 to 54 years old (see below chart).

The baby boomer’s accumulation of Australia’s housing assets is illustrated by the most recent ABS Household Wealth and Wealth Distribution survey, which shows that the baby boomers hold 45% of owner-occupied dwellings and 51% of other dwellings (investment properties and holiday homes). Further, those aged 65+ hold a further 21% of Australia’s housing assets, taking the older cohort’s (those aged over 45) share of Australia’s housing stock to 67% (see below chart).

However, 2011 marks the year when the oldest members of the Baby Boomer generation – those born in 1946 – turn 65 and reach official retirement age. From each year going forward, the number of retirees in Australia is expected to grow significantly:

Since Baby Boomers are heavily exposed to housing and hold relatively little in the way of financial assets – certainly not enough to fund a comfortable retirement – it is highly likely that many will look to sell their investment properties/holiday homes and/or downsize in order to finance their retirements. The reforms to aged care flagged in the above Fairfax article will only exacerbate these trends.

The incentive to sell-out of property will also likely intensify once the baby boomers realise that there is every likelihood that home price will stagnate or fall over the foreseeable future and that superior risk-adjusted returns can be achieved by investing in cash and fixed interest. These incentives to sell will be maximised where investment properties held by the boomers are negatively geared, which is: (i) a loss-making activity in a stagnant housing market; and (ii) no longer feasible once retirement is entered, since negative gearing requires taxable interest to offset losses with.

Therefore, demographic demand for housing is likely to slow significantly (albeit gradually) over coming decades as Australia’s population ages, which should act to slow house price growth.

Supporting evidence:

The above analysis is supported by a Bank for International Settlements (BIS) working paper, published last year, which examined the impact of changing demographics on asset prices (particularly housing) in 22 advanced nations over the next 40 years. The results suggested that ageing will lower real house prices compared to neutral demographics (i.e. where the age profile of the population remains constant) over the next 40 years in all 22 countries in the sample.

The below BIS chart, which shows the demographic impact on house prices over the past 40 years (1970 to 2009) and the next 40 years (2010 to 2050), is particularly relevant for Australia’s housing market.

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 impact of Australia’s changing demography on asset prices and investment is a topic that has to date received little attention from the commentariat. This is possibly because demographic shifts are inherently slow moving, so their impacts are gradual and tend to go unnoticed for extended periods of time. Nevertheless, these longer-term dynamics are significant and are likely to significantly alter the growth trajectory of asset valuations in the decades to come.

It therefore pays to consider Australia’s changing demographics when planning any long-term investments, as well as policy decisions that could exacerbate these trends.

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Unconventional Economist
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  1. As someone who has worked in the industry and done the research, if the critical saturation required to make retirement living feasible requires people to sell their homes to fund their retirement living product, then house prices cannot go up at the same time.

    I always used to remark to people (and this is being really simple about it) that there just aren’t enough younger people out there with the money to buy our parent’s expensive homes (at their current prices) and something will have to give.

    My view was that retirement living would be a failure, mixed with a bit of house price decline driven by boomers selling up (and more decline for other reasons). The problem is that most new retirement living products are being built on land bought for resi product in the last 10 years at very inflated land prices and they don’t stack up at affordable rates.

  2. Currently, some aged cared center already uses this method. Unfortunately, it become like a prison, and it give every incentive to encourage a premature death. Furthermore, the operator will also borrow to the tilt using the bond, take the money out, then go bankrupt. The Government of the day will then be left to pick up the pieces.

    For the scheme to be sustainable, you must match the funding to the spending. When you consider the risk profile of a retired person, what they need is a pension : a safe, non-taxable income which goes up with the CPI every year. It is not something a commercial entity can supply. The Government should therefore implement a scheme where a retiree will exchange a lump sum in return for an annuity amount which goes up with CPI. There are two benefits to this :

    1) The Government get the cash upfront, which can be used to pay benefits. (a bit like a ponzi scheme..). The extra money can be used to displace foreign lending of the banks.

    2) Unlike a bond, the liability does not show up on the balance sheet. It’s a recurring expense which disappears when the retiree passes away.

    The retiree can then use the money to pay for their own care, without being forced to stay with one age care provider. It will also mean the children will get nothing : which is a very good thing.

  3. The “Zimmerframe” bond will be sold to the superannuation industry, by decree.

    This will be accompanied by tranch b which will be “Zimmerframe housing bond”.

    The inflation crematorium will assist the boomers into boomer heaven.

  4. Sandgroper Sceptic

    Good article UE. My BB parents are about to kick start the process with their own house sale, given Mum’s 1946 birth date their thinking (and that of their friends) is perfectly encapsulated by your article.

    Lots of issues in this sector. Given the long lead times they probably won’t be addressed.

  5. There’s nothing for it now but to raise the retirement age to 90.
    Up here in the North(qld) the preferred occupation of the wrinkled folk is to ‘calm’ the traffic by driving caravan rigs in convoy, at 15 klms/hr less than the limit(overtaking lanes excepted).

  6. +1.
    As a side note, I attended a Western Sydney Council luncheon yesterday in Blacktown with members from Blacktown City Council and NSW Department of Planning also local businessmen, infrastructure engineers and consultants, developers and landowners.

    It appears NSW is making significant progress to release more land planned for next year, with Barry O’Farrell pushing through the “Restart NSW Fund Bill” funding infrastructure which is much needed.


    Long story short and talking to engineers who are currently designing the road and rail infrastructure, Sydney will finally have a significant amount of land released, with Barry O’Farrell determined to bring down house prices to an affordable level.

    This will be an interesting time in Sydney in the next couple of years with the increase in affordable housing supply in Western Sydney at one end and baby boomer higher end homes for sale in the mature suburbs of the East, North and South.

  7. Once upon a time there was a thing called a ‘granny flat’. I’ve long since accepted that I’ll be supporting my parents in the final years of their retirement, and I expect a lot more people will discover this is the choice: care for your family, or let them rot in some over-priced hellhole.

  8. ceteris paribus

    I’ve read the AMP NATSEM 2007 quartile figures on net wealth for oldies -(including me- no ageism in this post) and have thought about them as I have driven througth parts of Sydney and Melbourne.

    My overwhelming thought is that the figures are “crap”. My evidence for this colourful judgment?- absolutely none.

    But I remain highly suspicious- drug dealers are not the only ones who keep net wealth well hidden.

  9. 30% ? Try 170%. That is the extent of the bubble in housing, homes are around 170% higher that general inflation, the kast 100% caused purely by investor speculation, the money for nothing crowd.

  10. Sam Birmingham

    Thanks for this article, Leith.

    As always, it’s not to see someone actually digging into the actual implications of our politicians light ‘n’ fluffy announcements, exposing them for what they are.

    Nice also to see that BIS analysis again… If there is one economics-oriented NGO with its credibility still intact post-GFC, then BIS is the one. Their GFC predictions were prescient and the generational work looks spot on too.

  11. Interesting point to add is that only around 5% of the population aged 65+ live in a retirement home. The system is designed to keep people in their homes for longer and provide the care “in-home”.

    If there is no imperative to sell (Leith, it would be interesting to look at the mortgage – if any – this demographic have on their PPOR house) then they would stay where they are. For the “housing price calamity” to occur we would need to see the market swamped and people under pressure to sell. I just cant see this happening. If you have little or no mortgage pressure then why would you sell your home to take a bath on the price, particularly when there are products out there now to allow you to access the equity in your home to fund your income?

  12. Richard,
    my point from someone working in frontline healthcare of the aged is that there comes a time when most aged would like to stay at home but due to a heath event they no longer have the option to – (usually post a fall at home or dementia) -unless they are cashed up and can afford a live in nurse? or have family that can provide round the clock care? if not they must move into that grand old place….