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A home not enough for retirement

Jul 29 2012 18:15
Adri van Zyl
Johannesburg – People who believe they will make enough money from selling their primary dwellings in order to retire in comfort have unrealistic expectations.

This worrying trend among homeowners has emerged from the latest Old Mutual Savings & Investment Monitor, and the message from various property quarters is that home ownership does not guarantee a comfortable retirement. Homeowners have to make addition financial provision for retirement.

Research has found that the number of urban working people who will largely depend on the value of their primary home for retirement funding has risen from 5% in November last year to 14% in June.

The number of respondents who will partly depend on this asset has increased from 22% to 40%.

The research also shows that a large proportion of younger people and people in the high income groups have similar expectations.

Lynette Nicholson, chief researcher at Old Mutual, says homeowners seem to think they need save less for their retirement because they will be able to sell their homes, buy a smaller, cheaper place and use the difference to fund their retirement.

“It's unlikely to be that easy or that profitable,” she says.

It is particularly dangerous for the large proportion of people nearing retirement age and still paying off their home loans.

The research shows that 40% of homeowners born before 1965 (the so-called baby boomers or post-war generation) and rapidly approaching retirement are still paying off mortgages.

It is improbable, in the current environment, that they will be able to sell their houses at a price good enough to produce a reasonable income after retirement.

Nicholson mentions the example of houses in a middle-class suburb in Alberton, where the average asking price is R950 000. These houses are selling for an average R30 000 less than price asked and, after agent’s commission of 7.5% is paid, only R851 000 remains for the homeowner.

In the same residential area, the average purchase price of a unit in a retirement home is R780 000. Even if you lower your living standard drastically, the remaining amount is insufficient to provide a monthly income.

Even if the retiree invests the entire R851 000, the yield from a conservative investment portfolio growing at 10% a year will be R3 500 a month if no more than 5% of the investment is withdrawn a year.

Erwin Rode, property valuer and economist at Rode & Associates, says units in retirement homes cost more per square metre than residential houses do.

“In practice the selling price of a house is not enough to buy a smaller place and leave one with a nest egg,” says Rode.

The exception is luxury homes. John Loos, property strategist at First National Bank, says the only case where the yield from the sale of a house can produce something is if there is a difference of R3m or more between the selling price of the house and the purchase price of a unit in a retirement home.

He nevertheless says that the selling price of the average home is not enough to provide for retirement and people depending solely on their equity in a primary residence for retirement funding are exposing themselves to the risks of volatility.

Nicholson says the large proportion of young people (18 to 34 years) relying on the sale of their primary dwelling for retirement money points to unrealistic expectations of future property prices.

The great faith that young people put in the value of their homes for retirement funding is, says Nicholson, a possible indication that they are not making any other provision for retirement.

- Sake24

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old mutual  |  property  |  retirement


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