'Logic-defying' property prices good news for older Aussies

Homeownership is older Australians’ passport to comfortable retirement, according to countless retirement specialists, and the outlook just keeps getting rosier.

The good news – for homeowners – is that the property market is “defying valuation logic”, according to leading property experts, giving older Australians added confidence that they can access equity in their home to bolster their lifestyle.

Seasoned real estate professionals are shaking their heads in disbelief at property prices. Late last month a panel of valuation and property experts met to discuss what’s happening around the country – and where to from here.

“The prices that were being achieved in the middle of 2020 are just not relevant in the current climate,” says Jason Matigan, director at JPM Valuers. “We did a valuation in Manly (NSW) recently. The house next door sold for $4.1 million in May or June 2020, so our thinking was around $4 million on the property which was similar. It sold for $6.3 million! We see this across the eastern seaboard in Sydney and even once we go to the middle and the outer rings.”

Mark Wridgway, director and auctioneer at RT Edgar, is seeing similar scenarios in Victoria.

“Dollar per square metre rates have been thrown out the door. From September 2020 to now, some places across the [Mornington] peninsula have experienced an average of probably 30 to 40 per cent growth.”

Queensland had also seen rapid growth due to an influx of people from southern states. And with a greater focus on lifestyle and space, the regional market had grown by 25 per cent year on year.

The panel said the spiralling property price growth was due to a unique combination of events -low interest rates, lack of supply and a newfound appreciation for more space – and that even the latest lockdowns hadn’t put the brakes on the market.

Neal Ellis, national director of Preston Rowe Paterson Australasia, says the new focus on lifestyle has completely changed the market.

“If you’d asked me 20 years ago where you should invest, I never would have said go to the outer areas and have a look at what you can buy. [I would have suggested] buy something in a city that’s smaller at the same price point and you get better capital growth. But I’m not sure that applies anymore.”

Read more: Pension Loans Scheme gets a makeover, but is it enough?

The surge in property prices for homeowning retirees is opening new doors to retirement confidence.

For example, the number of people taking up the federal government’s Pension Loans Scheme (PLS) has grown more than five-fold in fewer than two years as more retirees tap into the equity in their homes to bolster living expenses.

Just 768 people had accessed the scheme at the end of the 2018-19 financial year, but that number had grown to 4039 by the end of March.

Dr Deborah Ralston, professorial fellow at Monash University and a member of the federal government’s Retirement Income Review panel, says that home equity for a typical homeowner at retirement is about two to three times the value of their super. And that makes accessing the equity in the home through schemes such as the PLS attractive.

Read more: Should you consider a reverse mortgage or equity release?

She offers the following example: drawing down $5000 each year against the equity in a $500,000 home would eat into only a quarter of its value by the time a retiree reached 92.

She adds that consumer protections around the PLS and other reverse mortgage products limit loan to value ratios, “ensuring that retirees have guaranteed occupancy and can’t run up negative equity in their homes”.

But more people are also retiring with a mortgage

Across the general population, the Australian Institute of Health and Welfare (AIHW) data shows the proportion of mortgage-free homeowner households has dropped from 43 per cent to 29 per cent in the past three decades.

What’s the best plan of attack for this cohort?

James McFall, managing director and financial adviser at Yield Financial Planning, told Money magazine that the most important thing for anyone retiring with a home loan was a plan.

“You may have accumulated a large amount of super and, combined with pension payments, there’s likely to be a viable strategy to pay the mortgage down over time,” he says. “Or an option might be to make a lump sum withdrawal from your super and pay off the debt.”

Read more: New downsizer change explained so you can boost your super

Author and financial adviser Helen Baker says mortgage debt in retirement can be “like a ball and chain around your ankle” and people need a solid plan to pay it off as quickly as possible.

“Do they rent out a room or have a granny flat where they generate income to meet those repayments?” she asks. “Do they have investments that earn more than the current mortgage interest rate to make it serviceable? Do they sell the property to extinguish debt and downsize to something debt free?”

CreationWealth senior financial adviser Andrew Zbik warns of the psychological costs of having a mortgage in retirement. “You don’t want to put yourself into poverty by refusing to downsize,” he says.

Gerry Incollingo, managing director of financial services firm LCI Partners, says: “A property you live in, unlike an investment property, carries no tax benefit to having debt attached to it, so I recommend paying off a personal residence as fast as you can.

“If it is looking likely that you will be retiring with mortgage debt, I would try to find ways to minimise that risk before you retire.

“Pay a little more off your mortgage each week, sell another item of value such as a car to put it on your mortgage.

“If that can’t be done, speak to a financial adviser to work out the best strategy to pay it off. Depending on how big the debt is, you can wipe it off with your super if you have a lot of super, but keep in mind you also need your super to live off in the future.”

Has the surge in property prices changed your retirement plans? Are you now more likely to downsize to a regional area? Or more likely to take a reverse mortgage product? Why not share your thoughts in the comments section below?

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Written by Janelle Ward



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