Retirement the top priority for property investors

3rd Apr 2018By: John McGrath

Setting up a good retirement is the main reason people invest in property, with most believing that superannuation or the pension will not be enough to fund a comfortable life after work, according to new research commissioned by the Australian Institute of Superannuation Trustees (AIST).

I couldn’t agree more. Real estate investment and retirement planning go hand-in-hand because both are long term goals.

As I’ve said many times before, property investment works best when it’s bought and held. Compared to other investment vehicles like shares, property is the easiest to understand. It doesn’t require frequent monitoring and its value changes very slowly. It’s simply easier.

An investor buying a property in their 30s has decades to let it mature with minimum of fuss. The rent generally pays most or all of the mortgage and tax offsets help cover any shortfalls. Plus, with most loans on 25-30 year terms, the property will be close to or fully paid off by the time retirement rolls around.

Investing early in life and holding for 30-40 years means you’ll go through several full growth cycles before retirement, delivering excellent capital growth for you to liquidate or a weekly income for life.

Aside from retirement planning, the research also identified what I believe is an increasingly important motivator for today’s mum and dad investors. While 64% of investors in the Home Truths survey (conducted for the AIST by Essential Media in Feb/March this year) rated retirement planning as the most important factor in deciding to invest, 39% of investors with kids said creating an asset to pass on was also a crucial part of it.

Further to this, 34% of investors with kids said concerns about their children’s ability to afford their own homes also drove them to invest in property and 29% said providing somewhere for them to live was also a primary motivator.

We’re seeing this on the ground across the East Coast but particularly in Sydney, where more parents are turning up to opens and auctions with their 20 or 30-something aged children looking to buy. Sometimes they’re just funding the deposit; other times mum, dad and child are pooling funds to purchase together.

Many parents are buying investment properties close to universities so their kids can live there while studying. Their child’s need for a home is the primary driver to buy, with the benefits of investment a close secondary factor. 

Declining affordability, particularly in Sydney, is prompting parents to change strategy on their pathway to retirement. They’re no longer solely focused on paying off the family home, going into retirement debt-free and doing a seachange with money left over from the sale of their home to fund the rest of their lives.

Today, they feel they have to act now to set up their kids’ financial futures too. This trend means more retirees are likely to go into retirement with debt – and will probably have to use superannuation to pay it down.

If we look even further into the future, taking into account declining rates of home ownership across Australia, we’ll eventually see more retirees finishing work without the safety net of owning their own home.

We hear a lot about affordability’s effect on young people but the truth is this problem has ramifications for other generations too. I can’t emphasise enough the lifelong benefits of buying that first property – whether for investment or first home ownership, as soon as you possibly can.

Affordability constraints are certainly making it hard in Sydney but I believe both first home buyers and governments need to take responsibility if a solution is to be found. We need to increase supply, create better infrastructure around major employment hubs, take an enlightened look at property-related tax structures (especially stamp duty) and fast track the local government approval process for new development.

Not only do we need to help young Australians into their first homes, we also need to ensure that our retirees are not struggling with debt or left reliant on welfare well after their working lives are done.