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Stop treating the family home as a retirement sacred cow

Created On: 17/03/2022

For individual Australians, a reasonable standard of living in retirement can only be achieved with appropriate accumulation and decumulation solutions. As the Baby Boomer generation continues its transition into retirement and life expectancies rise, we must be open-minded to ensure we have the retirement solutions to meet retiree goals right to the end of their days.


Better retirement outcomes are achievable if we stop treating the family home as a sacred cow. One of the big blind spots we have in the retirement income system in Australia is homeownership and the family home in particular.

About 76% of people over the age of 65 at present in Australia are homeowners, but that disguises a large number of renters and an increasingly large number of renters who are moving across from working life to retirement. About 12% of those over 65 currently rent and another 11% live rent-free or in residential care.

One of the features of Australian households when we look at their portfolios is that for the majority, particularly above the first quintile of wealth, the family home is their largest asset, and it's also the least likely to turn into retirement income. It's the aspect of their portfolio that is perhaps the most difficult to deal with when people come to retirement and the least likely to receive attention.

The three ‘Ds’ of homeownership and retirement incomes

When I think about the way that Australia deals with homeownership in relation to retirement incomes, I would give it a grade of D, and that's not D for a distinction, that's D as in A, B, C, D, next letter E. And my concerns in relation to housing and the way that it's treated in our system can be considered as three ‘Ds’: first is distortion, second is difficult decumulation and third is denial.

1. Distortion
In an efficient economic setting, renting and investing would be equivalent to investing in an owner-occupied house. I would be neutral, setting aside my personal preferences, to whether during my working life, I rented a house and invested elsewhere, or bought in an owner-occupied home. But we know that for many reasons in our system, homeownership is very attractive. I think that there are four things worth highlighting.

First, it’s often overlooked that mortgages give households access to leverage that isn't available to them to purchase other types of assets. During our working life, the big loan that most of us attract is to purchase a house, and that's a huge advantage to those who have sufficient income to support mortgage repayments. It’s a critical way that young households can leverage that human capital.

Second, homeownership is very attractive and excessively attractive in Australia due to unique tax advantages, obviously around capital gains.

Third, over-investment in housing is supported by the means test exemptions through the social security system partly while people are working and certainly after their retirement. These regulations also discourage downsizing once people have moved into the retirement side.

Fourth, mortgages offer households a special type of savings precommitment device that shares a lot of similarities with the mandatory superannuation. This precommitment device is a way that households get around their own impatience and tendency to spend too quickly and rather, preserve wealth for the future.

The overall goal of the retirement income system is to allow people to reasonably maintain their working life standard of living during retirement. Achieving this goal is much more likely for homeowners than it is for renters.

So one of the areas of obvious attention as our population and asset structures change is that more people are moving into retirement, and homeownership causes a great deal of inequality. Even if homeowners and renters manage to accumulate similar amounts of wealth, they are treated quite differently by the retirement income system.

2. Decumulation difficulties

The second ‘D’ are the difficulties in decumulation. The intention of the retirement income system is to provide an income in retirement, but our system means that the most valuable asset in household portfolios is inflexible when it comes to supporting consumption. We also have these increasing trends to later entry to the mortgage market which means that people are bringing debt into their retirements. So our other financial assets, which are fungible, are being used to pay off debts associated with a very inflexible asset.

This lack of liquidity encourages households to use houses to save up for major contingencies like costs of aged care or indeed for bequests. Storing up wealth in houses for those major contingencies also highlights further inadequacies in our system. Our insurances around these big risks are not very well developed. We don't have good products to provide for the needs of aged care and other expenses that means houses are used by households to cover them.

3. Denying the role of the home in retirement income policy

And the final ‘D’ is denial. This is the largest asset in most household portfolios but so far it hasn't attracted much attention, either explicitly in retirement incomes policy or in product design from the industry. We know that the Retirement Income Covenant allows superannuation fund trustees to use homeownership as a characteristic for distinguishing between cohorts of members, but things don't appear to be changing in the product space. Most of the products that are coming to the fore do not directly address or model homeownership as part of the wealth management strategy that they're addressing.

That’s three ’Ds’: distortion, difficult decumulation and denial. There's an elephant in the room that we really need to address.