“When you consider the increase in renting costs, it highlights the need for increasing numbers of retirees to have much greater super balances to support a reasonable retirement.”

Sydney-based retirees who rent privately may have to save more than four times the amount of superannuation if they expect to live the same lifestyle as homeowners who own their homes outright, according to the Q1 2017 Milliman Retirement Expectations and Spending Profiles report.

It raises a new aspect to the housing affordability debate as skyrocketing property prices squeeze a generation out of the home ownership market.

The median retired Sydney homeowner aged 65-69 spends $31,987 a year, with the Age Pension (which is not affected by the value of the family home) funding the bulk of expenditure. Older Sydney residents stuck in the private rental market are not so fortunate. They must find an additional $21,679 a year, based on CoreLogic median estimates net of Centrelink Rent Assistance. This makes their annual cost of living two-thirds higher to fund the same quality of life enjoyed by homeowners. While Sydney has the highest rental costs, other capital cities show similar trends.

Figure 1: Median annual spend including rent payments 65-69 yo

Source: Milliman Retirement Expectations and Spending Profiles Q1 2017

These differences in annual expenditure have even more significant repercussions for the level of super savings needed at retirement. To fund the median Sydney homeowner’s annual expenditure through retirement with 75% certainty requires a balance of just $145,597 (largely because of Age Pension support). However, to fund non-homeowners’ much higher annual expenditure through retirement with the same certainty would require a super balance more than three times that, at $595,482.

These forecasts are based on Milliman’s sophisticated stochastic modelling assessing thousands of scenarios across a balanced investment option including variations in returns, inflation, spending drawdowns and the impact of the Age Pension.

Figure 2: Superannuation balance required to rent (75% certainty)

Source: Milliman Retirement Expectations and Spending Profiles Q1 2017

Whilst these issues currently only affect a small number of retirees, the problem is likely to increase in the future, given that the level of home ownership is dropping across all other age groups.

Around three-quarters of older Australians are homeowners while 7.3% live in private rentals, according to the December 2015 Productivity Commission report. However, the Household, Income and Labour Dynamics in Australia (HILDA) Survey shows home ownership levels for people aged 35–44 dropped from 63.2% to 52.4% between 2002 and 2014. Similarly, home ownership levels among people aged 45–54 declined from 75.6% to 67.4% over the same period.

Australian residential property, led by Sydney and Melbourne, now ranks among the most expensive in the world. Since June 2012, residential property prices across Australia’s capital cities have climbed by a cumulative 47.3% with Sydney prices up 74.9%, according to CoreLogic.

Outright home ownership has traditionally been seen as key to avoiding poverty in old age. However, as housing affordability edges further out of reach, this could lead to a greater proportion of older Australians paying off their homes well into retirement.

This new data shows that rising property prices are a problem we’re not growing out of with age.

Based on article by Jeff Gebler and Wade Matterson

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