Super staring at a ticking housing time bomb — the mortgaged retiree

New figures show core assumptions about housing and superannuation are out of date.

Most of the angst in relation to housing costs relates to first-home buyers — few, it seems, have looked at the other end of the spectrum … how will it hit retirees?

It’s time to pay attention to this issue because it’s going to have major consequences for investors depending on residential property and pension access … in other words, just about everyone.

Two very important pieces of research released in the past few days pinpoint the issue: economist Saul Eslake has shown that the number of homeowners heading into retirement that still have a mortgage has tripled since 1996 to 45 per cent. Meanwhile, Recep Peker, head of research at Investment Trends, reports the portion of Australians who believe their savings will not carry them through retirement is now the ­majority.

The consequences of these changes are pretty obvious for ­society at large — we are no longer a nation of homeowners and more older people are heading towards dependence on a government pension than many might assume.

The particular consequences for investors are highly pertinent — both developments tell us a lot about how the housing market is evolving and they also put a cloud over the retirement system as we know it … and by that I mean as we know it after the slew of reforms to pension access introduced in January this year and the swag of reforms on superannuation contributions and tax-free income due to begin on July 1. Here are the key developments:

There will be more middle-aged renters than forecast.

We hear so much about younger home buyers not being able to crack the housing market that we may have underestimated the wider effect of higher prices — yes, the proportion of households 25-34 living in rented accommodation has risen by about a quarter since 1996 but the number of households renting in the 45-54 age group has risen even faster … it is up by a third.

For landlords it means who they rent to is changing ... a layer of Australian society will be renting apartments and houses that has not done so in meaningful numbers since the 1940s.

Leveraged retirees will become common.

It’s been one of the great questions in recent times as people took on ever larger home loans at an older age … how many retirees will have mortgages?

Eslake used both census data and broader ABS housing data to build figures to be used by the Australian Institute of Superannuation Trustees that show the age group between 55 and 64 has seen a tripling in those who have not paid out their home mortgage. As Eslake asks — what will this group do on entering retirement? “They are likely to apply at least some of their accumulated superannuation to discharge the debt” (once you are over 65 you can spend your superannuation money — it is no longer preserved.

In turn this creates a new problem: wealth in superannuation ­accounts will be lower than forecast. If this group does not use superannuation in this way, they will be leveraged at a very late stage in their lives.

The “put it on the mortgage” mentality has had a price.

Over the past decade bankers — and more commonly, mortgage brokers — have regularly encouraged home loan borrowers to toss in other costs on to the mortgage such as related fees. With very low rates, the practice was popular and rational for the borrower — the problem is that mortgages are now bigger than they might have been.

Eslake suggests “the consolidation of consumer finance into mortgage debt” has directly contributed to the rising portion of older people struggling to pay off mortgages.

Confidence in the accumulation of sufficient retirement savings is waning.

Peker, of Investment Trends, reports that most of more than 6000 Australians surveyed said they did not believe they would outlast their savings. The research group said earlier this week the portion of those already retired who “expect to outlive their retirement savings” is now 51 per cent, a significant jump from a figure of 33 per cent the last time the question was put through the survey in 2013.

The report attributed the declining confidence largely to ­“potential falls in the sharemarket and changes to superannuation rules”.

The assumptions behind a “comfortable” lifestyle are too low.

The rising number of retirees with mortgages will mean housing costs — typically assumed in government modelling to be extremely low — has been underestimated. In turn the very notion of what is a “comfortable” retirement when defined in terms of income a month is set too low in a range of government and related reports. The levels of pensions planned by government are not going to be enough if the portion of the homeowning population entering retirement with mortgages has tripled.

Either pensions will have to be cut, or access trimmed further.

The pension access cuts introduced in January this year are not over. Either the government will have to make direct cuts to pensions or it will have to trim access further.

The stalling of indexation of payments may not be enough to deal with these looming changes.

Millions of Australians plan retirement income as a balance of private super savings and some form of partial pension access — such plans are now in jeopardy. Millions more hope to be landlords but it turns out the number who will be tenants is higher than anyone thought … it’s a time bomb for the retirement system and a disturbing trend for society.