Friday, June 26, 2015
Written by guest contributor & property expert Terry Taylor
Changing demographics in Australia are ushering in a new norm when it comes to housing types. This change in the type of housing will, and is already, creating opportunities for owner occupiers and investors alike.
The impact on those of us moving towards retirement is significant and in fact may surprise and even shock those who are looking at future lifestyle options.
For many years the “must have” element for a residential property was land. Land and lots of it. And this was where most of the capital growth was. Quarter acre blocks (1000m2), larger if possible, was what we all wanted, especially for our family homes.
But as the saying goes, they’re not making any more of it.
Australia is a very large country and has lots of land so why is it, that the size of housing blocks around the country is reducing rapidly? The answer is access to infrastructure and quality amenities. These amenities are critical to the lifestyle aspirations of most people today and those amenities are always located close to our major population centres.
There is simply not enough land left close to the centre of our cities for everyone to live, so housing blocks are becoming much smaller and more people are living in apartments, townhouses and terraces.
It is the convenience and enhanced lifestyle provided by these amenities that has attracted an increasing number of retirees. The chances are that these amenities will be attractive to you too. What most of us seem to want is the lifestyle options afforded by today’s café society.
Where many of us would like to live out our retirement years is, more than likely, increasing in value at a faster rate than the home in which we are currently living. This is despite the fact that we may live in a large suburban home and our intention will be to downsize when the time is right.
It is where we hope to downsize to, the location, which presents the problem. The reason is that this is exactly where many others will want to downsize to as well.
Whilst land will always retain its position as one of the most desirable aspects of the value of a residential property, it actually comes second fiddle to location. Location, location, location is the old adage which is quite rightly held up by every property expert as the penultimate characteristic of a great property. This is the reason why you need to plan now and to avoid disappointment and unwanted compromise in your plan for the perfect retirement home.
Most people do not consider where they are going to live in retirement. They are too busy with life and all its demands to really plan how they will live after they become empty nesters. Little thought is given as to how they will spend their time after they finish their paid employment. Most would like to take the time, whilst they still have their health, to travel, maybe visit family and friends and to do all those other things they denied themselves during their working years.
The fact is that there is a very large percentage of impending retirees or future retirees all wanting the same things. To be close to the action, that means coffee shops, easy transport, lifestyle amenities, hospitals, movie theatres, cultural facilities and so the list goes on. For some it may even mean a home at the beach, although for most it will be in the cities where their family and friends are.
The desirability of the locations where those properties are, means that the growth in value of the properties in those locations will be greater than the properties in which most of us live now.
Let us just consider some of the facts:
Fact 1 – Many, if not most people, will eventually downsize from their current, often larger home for lifestyle and or health reasons, sometimes a combination of both of these reasons.
Most people I would suspect, would prefer to remain part of the mainstream of society until their options are removed. Ideal retirement properties will, other than location, be single level properties, houses on small blocks of land, townhouses or villas or an apartment in a building with a lift. These are the only options that will extend the independent lifestyle of a person who does not want to contemplate moving to a retirement village earlier to live with other older people.
Fact 2 – Research has shown that most people have an expectation that not only will their current residence provide the necessary resources to buy the “NEW” downsized property but also, because they are downsizing, there will be additional funds left over after the transaction to add to their retirement resources. We don’t believe that this will be the case for most people, with most retirees finding that their ideal retirement property costs much more than they expected.
In simple terms these are your options.
Option 1: Do nothing now, wait for retirement and then consider relocating.
As this simple chart demonstrates, you now have $1,100,000 less selling and buying costs (up to $100,000) to apply to our new “lifestyle” PPR.
What are the implications of waiting until retirement to buy your new PPR?
On the upside you will have some funds to add to our retirement pool if you spend considerably less than the current value of your present home.
But on the downside, you will have to dig deeper into our pockets if the home we would like to live in costs more than the value of our current home. This may force us to put off the inevitable move, as it is too difficult to make a decision and we don’t like the resulting compromises we will have to make.
What can we do and why it makes so much sense to do it?
This leads us to option two.
Option 2: Buy your future principal place of residence PPR now and retire or relocate in 5 – 10 years
With this option we now have two properties valued at $1,100,000 each (i.e. $2,200,000). If we borrowed the full amount of the purchase price of the second property, we will have a debt of that $750,000.
When the time comes for retirement we sell our current PPR and move into the second property purchased for retirement. We will get $1,100,000 less expenses as the proceeds of the sale of our current home to pay out the mortgage on our new home (no capital gains on PPR).
There will be money left over to update the new property (if required) and some funds left over to contribute to retirement funds.
Now as discussed above, what if the new lifestyle property is growing in value at a faster rate than the rate of growth of the current PPR?
The graph above shows that if the value of your future home appreciates at a rate faster than your current home, due to its more desirable location, then the future PPR will have increased in value over and above the increase in value of your current home by almost another $250,000.
The consequence of not planning and purchasing your future PPR early may be that you will have to raid your current retirement funds to live where and how you would like to in the future.
Research and years of experience in property has shown that the only other alternatives will be to stay put in your current home until it becomes too much for you to manage or for you to buy something that costs less than the value of your current home. Based on where we think more people will want to live, the strategy of not planning and not buying your future home early may be a huge compromise on how you had pictured your lifestyle in retirement.