The aging headwind.

The aging headwind.

There has been plenty of subject matter on our aging population and its clear Australia faces challenges ahead.

Allowing for a few fluctuations – since 1907 to present day, the fertility rate has fallen from around 4 newborns per woman, to 1.88 (a little above the record low of 1.73 in 2001.)  Significantly, this figure is below ‘replacement level’ which is considered to be 2.1 babies per female.

According to the united nations, life expectancy in Australia is ‘joint fourth’ in the world – coming along side Switzerland for the same recorded period (2005-2010) – and from most recent ABS data, a man and woman can be expected to live well into their 80’s with one in five Australians expected to last into their 90s.

It’s worth noting, the proportion of overseas born ‘Australian residents’ has also added significantly to our age weighted demographic with a median age – as of 2010 – of 44.7 years – a figure attributed to the large number of migrants who inundated Australia’s shores as post war ‘boat people’ when the last major call went out to ‘populate or perish.’

The number of older Australians aged 85 years and over has doubled over the past 20 years and is expected to increase as a proportion of the population, to 18 per cent in 2036.

Add to this the stark reality that in 2012, 250,000 Australians reached retirement age with an estimated 5000 reaching the age 65 weekly – and it’s clear Australia’s capacity to fund its population’s needs as the number of working aged individuals decreases, is being severely stretched.

In this respect, when you lift the blanket on unemployment data the trends are concerning and certainly not as good as the headline rate suggests.

Full time job growth is weak and both hours worked along with levels of underutilisation are deteriorating.  As the mining construction boom unwinds, non mining industries underperform, and we pull in our belts with fiscal consolidation, it’s likely we’ll see little change over the months ahead. The short term data is volatile and somewhat unreliable albeit, the long term trend is clear.

In 2009-2010 financial year 26 per cent of the government’s budget was directed towards age related services (health, age related pensions, and aged care) – however, according to treasury projections, this figure’s expected to increase substantially over the next 40 years “pushing the share of spending to almost half.”

 

As a result, each and every policy decision Australia makes in the years ahead will be – or rather should be – influenced by the necessity to fund an aging demographic.

For those currently reaching retirement, it’s hoped most will be able to provide for their own needs through a combination of superannuation, working past the age of 65, and tapping into their assets – the biggest of which is housing.

Some will downsize, some will look towards various financial products, such as a reverse equity loan for example – but a majority will have the good fortune of doing so in a house free of debt.

There’s no doubt baby boomers worked as hard as any modern first time buyer to purchase their principal place of residence.  They made significant sacrifices in a high interest rate environment often working, more than one job to achieve the dream of ownership – and in this respect, it’s never been easy.

However, they were lucky enough to get in at the beginning of the lending boom.

Over the years – financial deregulation, the emergence of duel income households, and the very real realities of our ‘golden decade’ of growth – which essentially gave purchasers a ‘get out of jail free’ card, knowing they could sell into a rising market if the going got tough – provided a layer of protection against loss of equity.

The outer suburbs were some 10km outside of established job and commercial hubs, not the 40km+ we see today – and as the population went through various phases of rapid expansion and different financial products were created, the number of buyers increased and mortgage lenders reaped the benefits.

However, the family home was not the only property acquisition from which this demographic drew benefit.  By 2009-2010 the total value of investment housing owned by our baby boomer generation was 57 per cent – a majority no doubt purchased with the tax advantage of negative gearing.

Baby boomers hold roughly half of Australia’s housing stock – a mix of owner-occupied dwellings and investments.  If Australia was to experience any significant downturn in house prices – or demand, it’s the generations heading toward retirement that would suffer most.

Thus far, population growth has somewhat supported the economy – however, due to woeful planning on both the part of state and federal Governments, we’ve evolved into a country gripped to its capital cities which play host to the highest accommodation prices in the country.

Furthermore, our environment has changed considerably.  From an atmosphere where a job was for life and family units were formed early, to a set of differing cultural conditions with fairly fluid fluctuation between periods of ownership and tenancy as buyers and renters migrate through various stages of their ‘employment’ career.

As a result, first home buyers purchase later in life, marry later in life, start their family later in life, and significantly, tap into their housing equity to fund rising costs of living and lifestyle, earlier in life.

An increasing number of first home buyers are rummaging into mum and dad’s ‘equity’ pot – reducing the retirement income stream of the current middle aged populous, and evidently -as census results project – it’s now expected future generations will reach retirement still paying down this principal debt with superannuation used to fund the difference.  Subsequently, the age at which most folk can easily retire, will extend well into the 70’s.

It’s all very well making the call to ‘populate or perish’ as some of our industry commentators regularly do however, it is notoriously difficult to predict changes in both natural and migrant fluctuations in growth.

In an excellent study by Jessica Brown and Oliver Hartwich entitled “Modelling Australia’s Demographic Future” it was found that increased migration on its own could not provide a viable solution to our aging population – significantly, it’s our falling fertility rates that are the biggest cause for concern.

As the paper points out, the current European Union average is 1.5 children per female – and if we were to match it with the downward trend in fertility rates, under the best case scenario (with continued high migration growth) the median age today – currently 37 years – will rise close to 46 years with the number 80 year olds set to reach around 2 million by 2050.

Furthermore, as mining investment scales down – unless there’s a considerable uptick in other areas of our economy – a scenario which is looking increasingly dire as manufacturing struggles and job losses continue to filter in from in various regions, it’s highly likely we’ll see a drop in net migration which will exacerbate the problem.

All in all – is it doesn’t matter what we do – whether we throw open our boarders (unlikely under current political opinion) or take a sustainable ‘steady as she goes’ rhetoric – which in essence means little, because even with a strict migration policy and a further fall in the birth rate, Australia’s population would still lead to over 29 million bodies by 2050 – we’re heading toward an aging tsunami.

Evidently, this presents significant challenges.  In years when house prices were booming, it followed that the level of consumer spending increased and credit growth was strong.

In a study by Australian Housing and Urban Research institute in 2007 (the height of the boom) it was found for every $100,000 increase in housing wealth, there was a bounce back in consumer consumption of $1000 to $1500 per annum.

It was all going swimmingly whilst the market remained rampant.  However, following the backdrop of GFC, households are saving more – spending less – and a marked proportion of those who purchased at the ‘peak’ of 2010 remain in negative equity.  As it stands, national turnover of sales remains weak.

The reducing number of first home buyers as a percentage of the buying market is significant.  As noted from a recent QBE LMI survey – and certainly shared by my own anecdotal evidence – first home buyers perceive prices ‘too high.’ Their budget is typically around $300,000 which will barely purchase a one bedroom inner city apartment in either Sydney or Melbourne, and is less than the average ‘new’ house price on the fringe ($400,000.)

They also recognise they will need to hold their properties for a longer period of time to advantage from an increase in equity. In other words – it will take longer, before an ‘upgrade’ is possible.

For those looking to downsize, the challenges are also evident.  Retirees don’t generally look at the apartment market when downsizing. Evidence shows most preference low maintenance single level, independent units, close to transport, shops, doctors and hospitals, ideally with space enough to hold the lifetime’s worth of accumulated memories.

However, the majority stock currently being developed consists of high density ‘squeeze as many on the block as possible’ apartments, double story townhouses – or new house and land packages – hence why the tendency to remain in their principal place of residence is strong.

It’s clear the property needs of home buyers must be addressed by urban planners if we’re to free up the market stagnation which will increasingly affect city dwellers as the population expands.

Adequately funding infrastructure for our fringe suburbs to boost the construction sector as well as reducing hefty development overlays which are passed onto the buyer, addressing policies to constrain investor and foreign acquisition into the established sector which does little to increase supply, not to mention the recent trend of land banking vacant blocks which could be subdivided into homes ideally suited to both the downsizer and young family buying demographic – all need addressing.

But the bottom line remains that politicians are not going to be able to control the inevitable – In the future-the dependency ratio (the relationship between the working age and non working age) is projected to be roughly 60 per cent – therefore we need to foster improvements to workforce participation if we stand any chance of offsetting this imbalance.

Demands on the tax payer will be immense, and with one in seven Australians a property investor, and one in ten, negatively geared it remains a key drain on revenue.

It won’t be politically popular, but this – along with other poor tax strategies – should be reviewed if we’re to survive the inevitable.

All in all – we’re playing ‘catch up’ as we head toward our aging headwind.

Catherine Cashmore

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