Boomers create stiff headwinds for housing market

By Leith van Onselen

Earlier in the week, the Daily Mail published an interesting article on the impacts of retiring baby boomers on the UK housing market.

According to the article, baby boomers transitioning into retirement are increasingly seeking to downsize in order to free-up cash to fund their lifestyles, which is in turn crimping house price growth:

Trading down from a large family house is now the single biggest reason given for selling by  homeowners approaching estate agents, says property market expert Rightmove.

Some 40 per cent of sellers say they are looking to trade down, compared with 25 per cent who hope to trade up to a larger more expensive property…

Rightmove said those trading down are generally from the baby boom generation, who have seen a sharp rise in the value of their homes in previous years, but are short of easily available cash.

The high cost of living, coupled with rock-bottom interest rates on savings and poor returns on personal pension investments, has left many retired people struggling to pay the bills…

These people are rich on paper – in terms of property wealth – but they are short of the cash they need to fund their lifestyles and family commitments.

Rightmove said the trend in downsizing is putting a cap on house price rises..

The expected impact of the baby boomers’ retirement on home prices is a topic that I have tackled previously (for example, here, here and here).

In a nutshell, my hypothesis is that Australia’s baby boomer generation – which comprises roughly one-quarter of the Australian population but owns nearly half of the nation’s housing assets – will gradually become net sellers of Australian housing as they enter retirement, thereby acting to push down home prices in the process.

The baby boomers were key players in the rapid house price appreciation experienced in Australia in the decade to 2008. As the baby boomers reached peak earnings age in the 1990s, they began buying up investment properties en masse as a way of both minimising their tax (via negative gearing) and ‘saving’ for retirement. They were 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.

However, with the baby boomers gradually entering retirement, it follows that their appetite for investment properties will shrink, at the same time as they are downsizing into smaller homes. As such, one of the key demand-drivers of house price growth over the past 15 years will disappear.

Further, because higher investment yields can currently be earned by placing their funds in a bank term deposit than can be earned via rent, it is also likely that many baby boomers will sell their property investments to fund their retirements. And this process of property divestment is more likely to accelerate once the baby boomers realise that there is little prospect of continued high capital appreciation.

As mentioned previously, my hypothesis is supported by a 2010 Working Paper published by the Bank for International Settlements (BIS), which examined how demographics are likely to affect asset prices, in particular 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 (see 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 tailwind that was the baby boomers’ insatiable demand for housing – both owner-occupier and investment – has dissipated and threatens to become a stiff headwind that places significant downward pressure on Australian home values for the foreseeable future.

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Comments

  1. No, no….you’ve got it all wrong. The Boomers will pass their properties down to their offspring and they won’t sell, thereby taking pressure off the offspring’s need to……Oh…I see!

    • Either the boomers sell of and Oz is f****d,
      or the boomers pass on their properties to the next generation who then won’t need to buy any property and Oz is f****d.

      • Well, that’s assuming a couple of things – passing it onto the kids (Late Gen X or Gen Y, basically) prior to inheritance wouldn’t help their financial position – more likely they’ll transfer through an actual exchange of money, structured in such a way to avoid stamp duty and transaction costs as much as possible. Then it’s up to the children to work out what they want to do with it – and I strongly suspect most would try to sell in order to own where they wish (usually closer to the city in an apartment).

        At least this is where the kids haven’t already got the investment property in their name to take advantage of the FHOG and other cash-splashes that happened over the last few years, which I suspect is far more prevalent. This won’t play out exactly as per the modelling suggests, either way.

        • Actually, it would make sense to pass it on to their children. Structure it right, and they can turn it into an annuity of sorts. Kids pay the mortgage directly to their parents with lower or no interest.

          Banks get cut out. Oldies get an effective reverse mortgage (without interest). Youngsters get a home and probably get to list their parents as dependents (lower tax).

          It’s actually a lot closer to a financial win-win than many plans I’ve seen.

          Question is, will anyone actually have the guts to risk their family’s relationship with a legally binding contract?

        • Jumping jack flash

          You would think, but there’s only a limited number of oil shieks and rich Asians they can entice in.

          Everyone else they bring in just pile into the same house.

          And don’t forget, US property is looking pretty damned good compared to ours, plus their economy is (kind of) improving, at least for the time being, while ours is currently the polar opposite.

          • You would think, but there’s only a limited number of oil shieks and rich Asians they can entice in.

            Of course there’s limit but is anybody know for sure how many middle-class population in developing market aspiring to migrate to developed countries like US, Canada, NZ and Australia ? I am not sure myself but judging from huge population of China, India, Indonesia and Malaysia, even small proportion of them will be quite huge numbers of candidates.

            There are different reasons for moving to other countries and thus different preferred targets e.g. USA, Canada, Singapore, NZ and Australia. I am afraid Australia has unfortunate reputation as great place for welfare-seekers thus in my observation in recent years has taken more migrants that put high value on soft, almost unlimited welfare payments. The immigrants that value more hard-work and self-reliance tend to prefer low taxing and low welfare place like USA and Singapore.

            I know this is just personal observation from anecdote scenes where I heard many migrants promote “good welfare policy” in Australia as selling point to their family / friends in their home-country.

          • Unfortunately recent migrants who have bought into the housing ponzi are not above being smashed like anyone else.

            The presumption by biased (and ignorant) middle class bankers that work ethic and family network will somehow shield this particular group from the harsh economic reality.

            The reality of making a very very poor investment decision.

  2. Currently in a large NSW North Coast town – spoken to few agents over the last few weeks – all say the same thing – bulk of their sales/listings are for people wanting to downsize.

    The other interesting obvious aspect of the market, which has been observed from here right through to the Qld hinterland, is the mass exit from small acreage.
    A process made even more difficult by the ridiculously massive houses and overcapitalisation in general that has occurred in the name of “lifestyle”.

    We live in interesting times.

  3. Aristophrenia

    I find it viscerally repugnant that you are claiming the baby boomer housing price theory as YOUR THEORY with links back to 2010.

    This is a general theory which has been long and well discussed for a long, long time – the known implications of which have been talked about for more than a decade.

    Its not YOUR theory, its a well known popular theory which absolutely predates your appropriation of it.

    If you need any confirmation of this just set your Google search to only return results prior to 2009, or 2003, or 1995 – as i did, with hundreds of results from all over the world detailing this phenomenon.

    I find this type of self aggrandizing and shameless appropriation very out of character for this website.

    The study of demographics and its impact on social services, welfare, housing, employment and SPECIFICALLY realestate is a well researched field and has been an ongoing concern for countries all over the world.

    Its not YOUR theory – its as common as dust mites, has been discussed ad nauseum for decades and is absolutely not new or enlightening – it is a well accepted norm of no greater insight than night follows day.

    • Leith isn’t claiming it as his theory to the exclusion of others, he’s just saying that this has been his hypothesis for a while. And as you would know from reading many of Leith’s other pieces he always gives credit where it’s due and cites the work of the many other economists and analysts who have similar theories/hypotheses.

      • Aristophrenia

        He lays down a great deal of ground work to substantiate it as his theory, including the repeated phrase “My Theory”, which was then corroborated by the BIS, in fact most of the article is going to lengths to rationalize it as HIS THEORY.

        No where does it acknowledge N. Gregory Mankiw and David N. Weil who’s theory it is – from two decades ago.

        Cheers.

        • You obviously cannot read as I said “my hypothesis”, which relates to the Baby Boomers selling-off negatively geared investment properties – an Australian phenomenom (since negatively gearing is allowed in only a small number of nations).

          • Aristophrenia

            Yeah right….seriously ?

            Sorry its your hypothesis – you came up with it.

          • Hypothesis “Something taken to be true for the purpose of argument or investigation; an assumption” It doesn’t mean it has to be ‘original’ or ‘exclusive’ does it? No!

    • Wow. Tell us what you really think!

      I find it “viscerally repugnant” that you accuse me of claiming the whole Baby Boomer retirement issue as “my theory”. Where have I done that. Please, give me specific evidence rather that vitriol. Put up or shut up…

    • Hypothesis rights!

      We could create them to sit proudly alongside patents and copyright.

      Hypothesis rights are the rights to proudly claim ‘I told you so’. When events or evidence prove you correct.

      Trampling on hypothesis rights should be defending by the use of public stocks where the miscreants are pelted with unread academic papers.

      I can think of one modest economic blogger on real estate who will corner the market in hypothesis rights.

      In this instance I dont think true hypothesis rights were being claimed by the author.

      But clearly he should tread carefully.

    • MB commentary is notable for its egotism, self-congratulation and tendency towards confirmation bias.

      I find my life is better when I filter out such things and just follow the more objective parts.

    • thank you for the confected outrage.

      this has been Leith position, it’s been publicly stated for a long time…

      get out of bed the wrong side today?

    • Aristo, take it easy. You picked the wrong fight today. You quoting Mankiw is like the Pope quoting Satan.

    • dumb_non_economist

      Aristo, you’re reading too much into UE’s words, I didn’t take it that way and neither has anyone else by the look of it.
      By the way which came first the chicken or the egg, night/day??? Go an have a cuppa you grumpy bum!

    • Are you an academic who has been arguing this for years, before anyone else did?

      If not, why do you care? To me it seems it’s the findings that matter, not who explains them.

  4. Aristophrenia

    One of the original proponents of the theory is here:

    http://ideas.repec.org/p/nbr/nberwo/2794.html

    The paper is actually from 1989 by N. Gregory Mankiw and David N. Weil, however there are plenty which even predate this – the Japanese of course were highly concerned with this trend and were studying it vigorously.

    A little bit of integrity guys – try and remember most of what you know and think is from someone else just recombined, its a simple fact of life.

    As someone who has spent a lot of time in Academia this kind of thing grates on me a lot, sorry for being such a pedant about it – its just irksome.

    Cheers.

        • Aristo,

          Is it possible that, as a self-confessed academic, you are placing too literal an interpretation on the word “hypothesis”.

          In academia that word perhaps has a very specific meaning, but in the population at large the term is taken more to mean ones’ “position” or “argument”, rather than imply a world-first scientific or social discovery.

          Yes, I think you are being a bit of a pedant.

          • Cognitive Dissonance

            Pssst….hes not from academia at all, at least not from the kind he would like you to believe. Hes just a someone with a sore head

          • +1 to this.

            I don’t think Leith writes as if he is the first to have considered or written about such themes, but I would challenge Aristophrenia to find an example of an Australian based economist/academic who has written about the subject as it relates to Australia with it’s negative gearing and other relatively unique aspects.

          • “self-confessed academic”

            Really ??

            my gosh, it s a free blog, not a paper.I am usually strict on references, but here, man, get a life.

      • Aristophrenia

        And again – just to reiterate that it was YOUR HYPOTHESIS ?

        “my hypothesis is supported by a 2010 Working Paper published by the Bank for International Settlements (BIS)”

        • I think UE simply meant that, although this hypothesis has been around for a while, nevertheless, some players in the market believe in it while others do not (i.e. we could reasonably infer, from the prices they are offering, that they do not believe in the hypothesis). He uses the phrase “my hypothesis” simply to distinguish himself from the non-believers.

        • For gawds sake Aristo, enough already!

          I think I speak for most when I say its more important that the issue is brought to light & discussed, rather than who thought of it first. Are you an intellectual property lawyer or something?

      • “Yes your are a pedant.” Why yes I am (you mean “you’re”).

        While I don’t think there was any need for such vitriol, I do have to agree that there is an air of self-congratulation about this site sometimes. Doesn’t mean it’s not worth reading though and I guess if you don’t blow your own trumpet, who will?

    • Rumplestatskin

      Aristophrenia,

      You are entitled to your opinion, and I hope you acknowledge that one interpretation of a single phrase in a blog post is not always the intended interpretation.

      In any case, Mankiw’s well-cited paper that you link is very interesting. Figures 4 and 7 tell their main story well enough – that demography influences demand of housing, and that baby-boomer had just about passed their house buying years (in the late 1980s).

      However, there is no mention of negative gearing, the accumulation of assets to fund retirement, and speculation on capital growth.

      Thus Mankiw’s model of demographic influences missed the massive 2000s boom by ignoring the investment market.

      From my reading, Leith’s idea is a little more Australian specific – that boomers’ investment in housing as a way to accumulate wealth for retirement (with the assistance of negative gearing for high income earners) has had positive price pressure and is about to be reversed.

      And, my reading of ‘my hypothesis’ is much less sophisticated, translating to ‘the hypothesis I support’.

      Anyway, great article. Any potential home buyer should at least consider these major shifts happening in the market.

      • Artisto,

        This is not a peer reviewed journal. In the strict sense of the word you have a point however this is a blog from a writer who is happy to admit errors and reference sources when it, given that there is a small amount of space for which he has to make his point, is required. I think you can interchange “my hypothesis” for “my opinion” or “my point” in this case.

        This has created a debate in the comments section surrounding a technicality instead of being about what is a valid concern surrounding an important part of the economy. It is concerning that this is happening and the research that you referenced actually furthers the argument that the “we are different here” chorus is again wrong and gives greater weight to UE’s opinion of where the market is heading. For that, thanks for the extra reading.

          • I think those figures – ’15, ’14, ’12 – are the year the student is expected to graduate.

            In this article about the walkout (http://tech.mit.edu/V131/N52/occupyharvard.html) lecturer’s names are noted in similar manner: e.g. “Nicholas G. Mankiw PhD ’84” and “MIT economics Professor Jonathan H. Gruber ’87”.

    • Me thinks Aristo’s account must have been hacked or that he woke up on the wrong side of reality.

      Other than that, Aristo, you are just being pedantic, being a stickler to the too literal meaning of words.

      And this is not an academic peer-reviewed paper. This is a blog. B L O G. Written to educate people. Especially the ones who do not have background or expertise on what he writes. In such posts, it is far more important to use a simple and clear language and not get too tied up in precise rules that control academic writing.

      And if you like academic language, how about this: Leith Van Onselen’s track record in the field of educating people about Australian Housing has been exemplary, and your comments just betray your ignorance.

      • +1

        If you dont like the word “Hypothesis”, in the literal, pedantic sense Aristo, how about “macro model” or “trading idea” or my favourite – a “contention”.

    • The above posts from Aristophrenia confirm my hypothesis that academics can be extremely pedantic, pretentious and difficult to stand, thus supporting my decision to avoid university study at all costs.

      Oh crud… it’s probably not MY hypothesis at all 🙂

      • Hey BB,

        Dude, let’s not begin a bogan pile-on on academics please. Is Aristo an academic, and what makes you think those who are standing up to this are not academic?

        • Aristo wrote: “As someone who has spent a lot of time in Academia”

          I didn’t intend to brush all academics with the same brush. But the whole ‘holier than thou’ attitude displayed here reminds me of a few others I have come across.

          • He might be the guy who empties the waste paper bins at the university? That would class as spending a lot of time in academia wouldn’t it? 😉

          • I’ll note that he didn’t say he is an academic (as I certainly am) just spent time in academia. Maybe he was a secretary or something 😛

            Your use of the word hypothesis is entirely correct. If you had in fact said theory then that’s something you could contend

  5. Just curious…

    This phenomenon will certainly reduce the price of free standing houses far from public transport. However, might it not also put a floor under the price of apartments – particularly in desirable neighbourhoods with easy walking access to shops, cafes, cinema, beach, transport, etc?

    • Yes – thus why local councils should allow market demand to determine the mix of development within some broad essential parameters.

      At the moment they still are obsessed with being little Speers creating the new municipal reich or being in the thrall of nimbies who want to control other people use or develop their property.

      • We know the state receives the stamp duty but what benefits do councils receive if they choose a denser development arrangement?

        The reason I ask is because my local council had increased land size minimum from 600m2 to 800m2 a few years ago. That pretty much negated my family’s plan build a duplex on a 700m2 block and thus getting whatever council fees they would receive from the proposed development.

    • Yes – thus why local councils should allow market demand to determine the mix of development within some broad essential parameters.

      At the moment they still are obsessed with being little Speers creating the new municipal reich or being in the thrall of nimbies who want to control other people use or develop their property.

  6. reusachtigeMEMBER

    Great theory UE!! Thanks for running it past us, it is very enlightening and makes sense. Cheers!

  7. Interesting how this might be affected by the performance of other investment classes. E.g., if the stock market stays below its peak, there will probably be more retirees (or wannabe retirees) who will feel obliged to downsize to fund the lifestyle they’ve promised themselves.

  8. Looking at the data, and having lived in the UK I observed what UE is posting on. The same was the case in the US when I was ridiculed for not taking out a jumbo loan to take full advantage of the system when I retired. It’s not the baby boomers, but the flawed system in many western countries that’s created this monster.

    One final thing most of my dad’s friends are not wealthy in a property sense, and nor do they have McMansions, so lots of generalisations by some in the comments today.

    Top post UE.

    • “One final thing most of my dad’s friends are not wealthy in a property sense, and nor do they have McMansions, so lots of generalisations by some in the comments today.”

      Quite a bit of that happens around these parts, a63. There is an assumption that if you have grey hair you must, by definition, be a money-grubbing, property-hoarding, old scrooge who doesn’t give a rats arse for any other human being, particularly those that are younger than you.

      The reality, of course, is quite different.

      It’s quite sad, really – each generation has so much to offer the other, yet there are those who seem intent on setting one against the other.

      One of the many reasons that so many of our immigrants have been so successful over the last 30-50 years in this country has been their cultural propensity for intergenerational cooperation and harmony.

      We could learn a lot from them.

      • Totally agree Julius. I think what we’re seeing now is the inequality in our society starting to cause resentment. If we ever fix this mining/housing only economy then things might calm down. There are too many vested interests in politics to deal with it. A banker mate of mine in the US said that the economy will never recover until housing does, and if housing is the one thing that makes an economy work then we’re always going to be in this situation.

        Housing a a basic human right IMO, and we should be able to invest in it, but not with the model we have now.

        I don’t know what the answer is, but no one seems to be able to solve it.

        • “Housing a a basic human right IMO, and we should be able to invest in it, but not with the model we have now.

          I don’t know what the answer is, but no one seems to be able to solve it.”

          I think this sums it up best a63, housing is a need, not a disposable asset like it has made out to of been over the last 15-20 years.

      • “Rich People plan for three generations
        Poor people plan for Saturday night”
        Gloria Steinem

  9. Great post UE. However, as a reader who pays almost as much attention to the comments as I do the article, I think your blog would be better served by editing out such patently ridiculous and irrelevant comments as Aristo’s, rather than rising to the bait and setting off a chain of off-topic comments, of which there have been a few recently. It doesn’t fit with the high calibre of your blog. Perhaps this flies in the face of the idea of a Comments section, but then again so does ‘Put up or shut up!’

  10. I would have thought that stamp duty in Aus would limit the amount of downsizing that would happen. After all why move to a smaller place if the state government will just steal any cash you free up. What I think will have an effect though is the baby boomers will stop buying investment properties and instead start flogging them off as you have mentioned before.

    • Jarrod

      As a Baby Boomer I can tell you the smart money investors will be shifting towards bumping up their Superannuation balances.

      Once they hit 60 it’s happy days – they can turn their super into what is called pension phase which means that any earnings in the superfund are completely tax free and likewise those earnings can be taken as tax free income in their personal names.

      Now that the Government, has in its wisdo ,reduced the tax deductible contributions to just $25k per year the only real avenue for bumping up super is through after tax contributions which are capped at $150,000 per year or bring forward three years amounting to $450k.

      So lets say, a husband and wife bolster their super by $900k which takes their super fund balance to $2m they can actually draw say at 6% yield a pension of $120,000 per annum tax free leaving their capital intact.

      Now if all the boomers start to cotton on to the merits of having large superannuation balances, earning real cashflow then it makes sense that we will see a family home sell down.

  11. That’s enough today everyone – I’ll give Aristo a pass, its fairly obvious its a sensitive issue with him/her, but let’s all just move on.

    Keep the discussion to the article thanks, all other comments will be removed.

    • I really think Aristo’s account is hacked into. I usually enjoy his comments, but today…ugh.

      • Unlikely, our security is very tight now, although the troll nest stirred a bit from its near death rattle this morning, which made me suspicious.

        I’ll continue to give him the benefit of the doubt, but in future we all need to stand back from the keyboard and carefully read what we have written before hitting the “reply” button….

  12. The down-sizing ‘Boomers are a powerful supply source – large well-worn middle-suburbs homes anyone?

    There is still a buck to be made in property development – creating single-level disability-friendly OYO housing for ageing ‘Boomers. Just cycle quickly, cos falling land prices will make delay a precipice.

    This demographic change has a financial twin peak: Negative Gearers exiting their dud (sole) investment in despair and bewilderment as the fall in land prices erases their asset base.

    Both groups face an exquisite ‘Prisoners Dilemma’ where the first to sell loses least.

    Don’t Buy Now!

  13. thomickersMEMBER

    by 2025, between 4-5 million people will be in aged care…of which 1/3 will need intensive aged care

    • Do you have any references for that figure?

      The ABS estimates population today at 22,913,785. My back of the envelope calculations give an increase of about 5 million by 2015, which will take us to around 28 million. 4 million in aged care is one person in seven, which seems excessive to me.

      • thomickersMEMBER

        Thanks for querying this

        got the figures mixed up in my lecture notes.

        5.5-6.0 million over age 65 (non-abs data).

        20-25% will be in retirement villages (low care) to disability age care.

        current figures are 2.7 mill over 65 of which 7% are in age care.

        I think the ABS projections for 2050 are 2.5 tax payers need to fund 1 retiree over age 65.

  14. Leith, as a non-property person, does this lend to the slow melt scenario. ie Boomers span almost a 20 year timeframe, retirement and downsizing spread commensurately. Cheers.

    • thomickersMEMBER

      These are approximate 2010 figures that I know of:

      60-65 median super women: $45,000
      60-65 median super men: $120,000

      60-65 mean super women: $95,000 (75th percentile)
      60-65 mean super men: $250,000 (75th percentile).

      My hypothesis is that at least the front half of baby boomers (we are 5 years in on a 25 year generation) will need to downsize for “financial reasons”.

      • thomickersMEMBER

        I forgot to add that only half of retirees are “coupled” and the other half assessed as single.

      • You are 100% right Thom. The baby boomers do not have anywhere near enough money to comfotably retire especially considering increasing life expectancys and advances in medicine. I wouldnt be terribly comfortable even retiring on the $345k if I was in the 75th percentile especially with the cost of aged care. $165k (based on median level for a couple) to last at least another 15-20 years, doesnt look good in the long run.

        • How can anyone ever acquire enough savings for 20 years of no income, from a working life of 40-45 years?

          The retirement age is poorly calibrated. That is the single most important factor.

          It’s impact is greater than the tickets being clipped by super fund managers, the volatility of markets, negative gearing, etc.

          • I couldnt agree with you more Rusty.

            However there are a number of factors affecting the concept of retirment that arent really discussed in the MSM.

            1. People who have worked their entire working life in physical labour intensive industries often cant work past 55 or 60, because of the damage done to their bodies over the course of their working life. For example my giflriends father for example has been a builder for 40 years ever since he left school at 15. He has maybe 5 years of labour intensive work left in him because of numerous work related health issues. He is currently trying to get into site management thankfully he has the skills. However unlike my girlfriends dad many of my friends dads dont know how to do anything but be a plumber or a carpenter and their bodies simply cant hack it any more.

            2. It is incedibly difficult for people out of work past age 50-55 to find a job because no one wants to hire someone that age and have to train them. In some cases they can have all sorts of marketable skills but still not be able to get a job because of their age.

            – About 5 years ago I was helping my sister buy school supplies at officeworks and I got talking to the cashier who happend to be an older lady about 60 years old. She had a double degree in Languages/Economics (she could fluently speak 6 languages) and worked for the UN for nearly 30 years, office works was literally the best job she could get after her forced retirement.

            – When I was at a Job agency about 6 years ago I was talking to a group of people doing a workshop on how to get a job. Half of them were the usual suspects just out of uni or high school. The other half were 50+, had lost their jobs and couldnt find another one and were being forced to do this workshop by Centrelink. Many of them had highly marketable skills and experience but once again because of their age people wouldnt give them a chance.

          • Tarric says: May 24, 2012 at 4:03 pm I couldnt agree with you more Rusty.

            However there are a number of factors affecting the concept of retirment that arent really discussed in the MSM.

            1. People who have worked their entire working life in physical labour intensive industries often cant work past 55 or 60, because of the damage done to their bodies over the course of their working life. For example my giflriends father for example has been a builder for 40 years ever since he left school at 15. He has maybe 5 years of labour intensive work left in him because of numerous work related health issues. He is currently trying to get into site management thankfully he has the skills. However unlike my girlfriends dad many of my friends dads dont know how to do anything but be a plumber or a carpenter and their bodies simply cant hack it any more.

            The deep fryer at McDonald’s isn’t too taxing, nor does it require much skill.

            2. It is incedibly difficult for people out of work past age 50-55 to find a job because no one wants to hire someone that age and have to train them. In some cases they can have all sorts of marketable skills but still not be able to get a job because of their age.
            – About 5 years ago I was helping my sister buy school supplies at officeworks and I got talking to the cashier who happend to be an older lady about 60 years old. She had a double degree in Languages/Economics (she could fluently speak 6 languages) and worked for the UN for nearly 30 years, office works was literally the best job she could get after her forced retirement.
            – When I was at a Job agency about 6 years ago I was talking to a group of people doing a workshop on how to get a job. Half of them were the usual suspects just out of uni or high school. The other half were 50+, had lost their jobs and couldnt find another one and were being forced to do this workshop by Centrelink. Many of them had highly marketable skills and experience but once again because of their age people wouldnt give them a chance.

            Beggers can’t be choosers. If that is labour left inert and there is capacity left, then there is no such thing as a skill shortage and employers will be forced to take them on.

            The corporation is here to serve the community, not the other way around. The corporation exists here to advance the commonwealth, that is why we let them exist.

            I keep banging on about this, the greatest welfare recipient in the country by far is the business community. It is why it can not compete outside our shores, it bleats, it moans, it gets virtually every decision go its way, and yet it is still not enough. It has been pampered to incompetence.

            This is one example, we let in surplus labour as to allow them to pay too small wages. We see this show up in wage share vs profit share ratios.

            Our deficit in proper wages underwrites business profits, or return to those that do not activate physical exertion.

          • thomickersMEMBER

            To be fair the front end of the boomers received the SGC in 1992 @ 3% of income moving gradually to 9% in 2002.

            If you expect 1% real growth in investments, you need to contribute 15% over your working life to achieve the same net income.

          • Some of the blame can probably be attributed to the financial whizzes (again). I knew several retirees through the boom times whose accountants advised them to take OS trips, buy new TV etc because they were making too much income (from their well-performing, share-based investments). They took the accountants advice, and thought the money (income) would flow like honey forever. No doubt (at the time) their superannuation fund’s annual reports arrived with over-ambitious projected earnings figures, which they believed.
            I wonder how some of them are faring now, and whether they wish they still had some of the money they dissipated during the good times.

            If everyone had a more realistic expectation of how much money they need to put aside for their retirement years there may be less profligacy during good times.

        • Good point RP. I would go further (and Rumplestat has many things to say about this too), that the very concept of retirement is outdated.

          Remember, social security was enacted by FDR at that particular age because it was the average deathrate in the 1920’s.

          Retirement itself needs to be retired. This means changing the way we acquire our “assets”, first and foremost this slavish devotion to spending multiples of money on what is basically a consumption item….

        • thomickersMEMBER

          $345,000 not a bad retirement for a couple and they have a fully paid home. They will be able to hit $40k-42k pa in tax free income in retirement over 20-25 years.

          most young couples with kids only live on $20-$30k once you take out mortgage costs ($20k-$35k)/child maintenance costs ($10k -$30k each year).

    • In my opinion 3d1k the boomers will cling to the idea of continued housing price rises or at least no nominal losses until it finally becomes common knowledge that the market is heading South. This supports the slow melt theory in the short term.
      However once A Current Affair or Today Tonight has a story on plummeting housing prices in regular residential areas (as opposed to places like the Gold Coast or Noosa) then the Bull rush out of property will begin and slow melt will likely turn from a trickle into a flood.

    • 3d1k – not really. The following generations on a yoy basis are roughly the same size.

      IMHO the effect of the retirement of the boomers has been overstated. It will have an effect, but not what people believe.

      • “The following generations on a yoy basis are roughly the same size”.

        Not according to Bernard Salt:

        “Over the four years to March 2008, the number of people at the beginning of the working cohort (aged 15-19) increased by 90,000 to 1.471 million. Over the following four years to March 2012, this number increased by 19,000 to 1.489 million. The rate of growth in the workforce-entry age group is slowing down; this is because the birth rate continually dropped throughout the 1990s.

        At the other end of the lifecycle, it’s a different story. Over the four years to March 2008 the number of people aged 65-plus increased by 243,000 to 2.815 million. However, over the following four years to March 2012 this number jumped 395,000 to 3.209 million.

        The reason for this tilting of the population out of the working cohort is the interplay between the rising number of people born in the late 1940s and earlier and the falling number of people born in the late 1980s and early 1990s.

        The rate of growth in the “old” cohort jumps 62 per cent in the second four-year period to March 2012, whereas the rate of growth in the “young” cohort drops by 79 per cent”.

        • Alex Heyworth

          Just looking at the “old” population is only half the story. To get the full picture you need to consider young people (ie dependent children) as well.

          The ABS says the dependency ratio (the number of people 0-15 and 65 and over per 100 people of working age) will be 49.7 in June this year, rising to 79.0 by the end of the century. (3222.0, summary statistics table)

          While I think this dependency ratio is an outdated way of looking at things (most people 15-18 are still at least partially dependent, few people at the moment continue working till 65, etc) it is indicative of the trend. Bottom line is that we need productivity growth of around 0.7% a year to maintain the same standard of living, given the deterioration in the dependency ratio.

        • Leith – I’m not saying that the boomers won’t flood the numbers of retirees and place a great strain on aged care resources etc, but the fact is that they will be replaced in the workforce by a roughly equal number in every following generation.

          Have a look at the age pyramid here –
          http://www.abs.gov.au/websitedbs/d3310114.nsf/home/Population%20Pyramid%20-%20Australia

          Forget about the Gen X and Gen Y tags, that misleads people, just look at the actual population numbers by age.

          There are more 60 year olds than 70 year olds which is what we expect to see, but there are also more 50 year olds than 60 year olds, and even the 40 year olds outnumber the current 50 year olds, and that is not what we are being told to expect.

          The largest bulge is between the ages of 20 and 30. The current immigration program will continue to some degree, so expect the population between the ages of 0 and 40 to increase in numbers even further.

          Now if boomers are retiring at rate X, then they will be replaced by a roughly equal number of people in following generations in the workplace, and demand for housing and all of the normal services will roughly also equal X.

          In fact by my reckoning, demand will be greater than it was for the boomers, unless the retirement age changes. All things being equal, the retirement of the boomers shouldn’t cause any great rupture in housing demand, or demand for medical services, transport etc.

          I think that we’ve built a myth regarding the exit of the boomers, and the impact that it will have. Bernard Salt is wrong.

          • In fact if we just look at males.

            Aged 70 – 78,056

            Aged 60 – 125,821

            Aged 50 – 155,284

            Aged 40 – 168,508

            Aged 30 – 164,480

            Aged 20 – 165,078

            Does that make my point?

          • The working population actually expands until the current 40 year olds hit retirement and then it is fairly static.

            The retirement of the boomers will place a huge strain on resources, but those same resources will be needed for the following cohorts. Little will change, and with immigration the sub 40 Y/O group will also expand.

          • I couldn’t disagree more Peter. The fact of the matter is that over the past two decades, the boomers have competed for housing with both themselves (25% of population) AND Gen X. So we’ve had a huge bulge of the population competing for housing (and other assets) at the same time. This situation will not continue going forward, as the number of retirees will increase significantly relative to those entering the workforce. It’s the relative shift between workers/retirees that matters.

          • Ah – ok I see your point. You are saying that total past demand from both the boomers and gen X has exceeded what will be the demand level going forward – OK I get that, but mathematically we should reach an equilibrium in the market as the new house hunters roughly equal the rate of retirees (subject to any change in retirement ages)

            So my point is that there won’t be this huge surplus of unwanted homes being dumped onto the market because those homes will be needed by a similar number of new households forming.

            Although supply will be better going forward the market shouldn’t be swamped unless there is a huge supply of new land coming onto the market, but as that will be largely some distance from the CBD, the more desireable locations closer to the CBD should be in demand, unless we develop cheap transport or fuels making outlying areas more attractive.

            So yes I would see house prices being more competitive as demand is being satisfied by supply, but not a market that is heavily oversupplied, unless technology/trends make a big change in social directions – eg everyone working from home – in which case outer areas may become more desireable than inner city.

            If that is right then land development and demand for construction will taper quite markedly.

            But what will the facebook generation do, what changes will they make?

      • 3d1k – not really. The following generations on a yoy basis are roughly the same size.

        And prior to that?

        Or is this the world famous Peter_Fraser_Logic_Deficit rearing its head again?

        Even if your assertion was true, which UE is indicating it is not, the accural basis previously has been the younger generation having population numbers in excess of the elder generation, not parity.

        Asset transferal has taken place via debt, namely many youngsters, buying small increments each via debt to pay the desired price of the elders.

        Now the youngster with peak debt, thanks to the housing bubble has to buy much larger portions of the elders assets. (or the elder has to accept a smaller price)

        To clarify that, 1 elderly technician could sell his workshop to 5 younger workers paying one fifth each, now only 1 youngster is available to buy the workshop outright… all because of the parity in generational size.

        • Sorry RP but your post doesn’t make any sense.

          Can you make your point in a logical manner.

  15. Thanks UE.

    I appreciate the various different ways that this blog returns to the proposition that, even in the housing market, the money in the end does have to come from somewhere.

    Cheers
    Yatima

  16. Bernard Salt has a pretty interesting piece on baby-boomer demographics in today’s Australian. The “dynamics” are clearly very important for growth, incomes and asset prices.

    Over the past few years, there has been a big flow of wealth from developed to developing nations. I suspect that this will continue but that within developed nations, there will be a big flow of wealth from boomers to younger generations.

    On another point, I think that it is worth clarifying the commentary on the BIS chart. The comment “the ageing of the baby boomers is projected to reduce Australia’s real house price growth by around 30% over the next 40 years” I interpret as reducing real annual growth over that period by 35% (i.e. reducing the real annual rate from 5% to 3.25% for example). Is this the intended meaning?

    Regards

    Stephen

    • Bernard Salt is a paid commentator for high growth industries and a big australia…..i’d take anything he says with a truckload of salt ( pun intended )

      • +1 His credentials are sketchy to say the least. He has previously touted himself as a demographer but I now more commonly see him referred to as a ‘social commentator’ (ie high-ranking member of MSM punditocracy).

  17. yogiman, david collyer, thomickers, all raise some good points above which suggest there’s potentially opportunities to come out of this demographic shift.

    While I agree that the transition to retirement for boomers could have a negative effect on the market as a whole, I would be very interested in hearing your (Leith, MacroBusiness team, commenter) views on where opportunity lies…

    e.g. Some areas that could be looked at:

    Which states have the highest number of retiring boomers or are most likely to attract them? And broken down to region/suburb specific levels if the data is available…

    What type of property do retiring boomers prefer (e.g. apartments are suggested above, but in my experience most would prefer to maintain a small garden)?

    What other investment vehicles (non-direct) are there which could expose an investor to the shift (e.g. any property trusts/shares which have a aged care facility focus)?

    etc

  18. One aspect that may temper this theory/hypothesis/contention is that some boomers who haven’t geared to the absolute hilt may choose to hang on to their IPs. If you’ve been negative gearing to the max and banking on massive capital returns then you’re in trouble, but if you’ve been a little bit more prudent and have been paying off the IP loan steadily to the point where you are positively geared or indeed cashflow positive, I could imagine that you won’t be so eager to sell.

    Falling prices increase the yield (barring any fall in rents, of course), and so make housing an even more attractive prospect than pulling your money out and sticking it somewhere else. Plus I think the “safe-as-houses” mentality will likely mean postively geared/cashflow positive types (which surely must account for a decent chunk of landlords) will hold on to their IPs, even in the face of declines.

    • I know one wealthy boomer, in his 70s, who lives on the shores of Clontarf NSW and owns homes all over the country, and who has no plans to sell anything.

    • boyracerMEMBER

      I’m not sure that I would want to keep my money invested in an asset that increases it’s yield by dropping in price.

      I agree though that where the IP is mortgage lite/free then the boomers would probably hang on to them for the rental income. Sustained price falls may change their mind on that option however.

      The other issue is how many IP’s are held in a super fund and need to be sold to meet minimum pension withdrawal requirements?

      • I agree that yield increasing due to price falls is not ideal – but if that’s happening and the yield remains high relative to other assets, then selling the IP and chucking the proceeds of sale into other assets will generate less income than you’re getting now. And that’s before you get into transaction costs.

        Interesting point about the super funds, though.

    • thomickersMEMBER

      You are correct.

      But on aggregate landlords lose money

      Unlike a wealthy landlord who owns property outright, negative gearers have limited options to mitigate any downside. They are essentially “all in”. The bubble will be like an unexpected “straight flush” in the game of poker.

      • Thomickers, to add to that, off the top of my head, it’s 1.2 out of the 1.7 million property investors in this country who negative gear, which is quite a large majority.

        The question is, how many of those 1.2 million will still be losing money each week on their “investment” when they hit retirement, as they will be the ones who really have to sell. Will it turn into a positive feedback loop of falling prices spooking ever more of these guys into a panic sell-off even before they hit retirement?

  19. SchillersMEMBER

    Great article UE, sidelined a bit by the back and forth with Aristo. The retirement of the BB generation will have a huge impact and not just on housing. Spending on everything that goes into a home will also diminish as the BBs retire. Less $ spent on extending and renovating, less appliances, hard and soft furnishings, less vehicles sold, etc. The resultant negative impact on overall private sector demand will be significant, as will the consequential increase that this aging generation will place on governments to fund increases in health, pensions and social security. All of this is happening at the same time that the private sector is deleveraging en masse after the biggest credit binge in history. Nothing the private sector can do is going to change these outcomes, imo. They are inevitable. As the population spends less and saves more overall, business borrows less as demand falls, unemployment rises and the cycle just repeats.
    The key question is when will governments realize that (in this scenario) only they can fill the demand gap by deficit spending and thus save us from the inevitable: severe recession/depression. All current indications point to governments and central banks wanting to do the opposite, ie. cut spending (thereby reducing consumer confidence and demand) in order to run surplus budgets at precisely the wrong time.

  20. christopher dahl

    UE, may be straying a little here however have you considered the scenario of death duties coming into play into the future? From memory Qld was the last state to still have them. Also increased taxation on Super Fund pools (which has been historically suggested by the OECD)? Both are unpalatable, however with future tax revenue declines, there may have to be fundamental changes with taxation (quite possibly exacerbated by declining immigration due to higher unemployment… remember the early 90’s, the immigration tap was literally turned off). What do the tea leave say? :0)

    • Alex Heyworth

      They’re called death duties because they are death to any government that considers (re)introducing them 🙂

    • To a certain extent ‘death duties’ of sorts already apply once the final member of a super fund dies. It was introduced by Costello and is 16% of the final assets if the assets go to a non dependent. On top of that the ATO now will tax the capital gain on sales of final assets once the fund has to liquidate the assets to pass them on to the non dependants.
      So there is likely to be quite an income stream in the years to come from this source.

  21. Jumping jack flash

    Boomers will be the ones to drag the market down, simply because they’re not afraid of some discounting when they decide to sell up.

    In many cases their properties have doubled or trebled in price, so even a huge 20% discount means little to them. It is all profit. Even more so when they are downsizing.

    Take for example my parents’ property. They paid 60K for it 30 years ago. They owe nothing on it. They have another block they want to build on, and also owe nothing on that one either.

    On the market for 500. No interest.

    Discounted to 450. No interst.

    Tempted to discount to 350.

    They could discount all the way to 60K and they wouldn’t have lost any money at all. They could also still build a reasonably nice retirement pad for 60K.

    • they would have lost a bundle in opportunity cost as that 60k put in liquid asset such as cash would be worth a lot more than 60K today. Basically its possible that inflation could ahve destroyed the value of they house. Of course if it was still cheaper then renting then they’re still ahead.

  22. The small cohort of Boomers whose financial position I’m acquainted with definitely reflect this article. Meagre super, paid off the house, worth multiples of what they paid for it and they don’t worry about having no super as they think it’s tied up in their house.

    • +10.
      UE, thanks for sharing your hypothesis and thoughts on this topic, which surely impacts the direction of the property market.

      Also agree with the points made by aiecquest in the comment below re lack of public discussion.

  23. The phenomenon is something I have tried to explain to friends in Oz who obsess about property and that baby boomers are an extraordinary demographic bubble having an historical impact (plus many retiring with both dependent children and parents in care).

    However, curious we see acknowledgement of this phenomenon in neither national (real estate) media nor politics, and if so, accusations of attacking “oldies” or “baby boomers”.

    Unfortunately, a phenomenon which should be central to any public debate about our future, government tax base, health care and benefits is precluded by “poisonous population” and immigration debate in media for short term political gains….