Does the world need a cure for living longer?

We are quick to celebrate advances in medical science which allow us as a species the opportunity to live longer. But the consequences of living longer are often glossed over. The economic consequence is that – worldwide – there are going to be more and more people in their old age relying on a smaller and smaller proportion of people of working (and taxpaying) age. It will affect different nations in different ways, so this is a quick wrap up based on the latest predictions from the United Nations population division.

The old age dependency ratio is a formula that expresses the population of people aged 65 and over as a proportion of those aged from 15 to 64. A rising ratio simply means that there are more people aged 65 plus relative to those aged 15 to 64. There is almost nowhere in the world this is falling. The world picture shows that we have gone from around 10% in the 1980s to one in four by 2050. Meaning that there was one person aged 65 plus for every 10 in 1980 but that this will change to one for every four in 2050. Those four will have to do the work that ten did in 1980, relative to supporting the 65 plus age group.

The rising dependency ratio is going to affect higher income nations with more developed economies to a much greater extent than lower income, less developed nations. The reason is pretty simple: wealthy nations can afford better health care and higher living standards. The difference is profound though – by 2050 high income nations will have a dependency ratio approaching 50%, compared with less than 10% for lower income nations. Will they be able to remain high income nations with this future burden? 

The continents that will be most affected broadly align with income status. The worst affected will be Europe, with a dependency ratio nudging 50% by 2050. North America is not far behind and Asia will be rapidly closing the gap.

Amongst the major European nations, Germany has a particularly nasty problem emerging on the forward radar – a dependency ratio of almost 60% by 2050. Little wonder German Chancellor Angela Merkel was so keen to attract such large numbers of refugee migrants (said to be more than 1 million in 2015 alone). France and the UK are following a similar pattern although with slightly lower dependency ratios and Russia only passes 30% in around 2045.

Closer to home, Japan is facing some serious problems. A forecast dependency ratio of 70% means there will be seven people aged 65+ for every ten aged 15 to 64. Japan’s dependency ratio is already problematic and this will get worse. China is also facing a rapid escalation in its dependency ratio which will rise quickly from around 2025, effectively almost doubling in the ensuing 25 years. I wrote about China’s people shortage (being a shortage of working age people) a couple of years back. You can click here to read it.

Australia itself shares a great deal in common with the USA and Canada in terms of our aged dependency ratio. We are currently in the midst of a significant increase which will see our dependency ratio rise from a fairly stable band of 15% to 20% from 1980 to 2010, to one in three by 2035. This will pose a range of budgetary challenges on both the income (tax) and expenditure (health and welfare) sides going forward.

The good news at least is that while we are increasingly better informed about the economic challenge of an ageing society, we are not ageing quite as fast as some places. Maybe we can observe closely how nations like Germany or Japan handle this escalating dependency challenge, and essentially copy the policies that seem to work best?

The bigger challenge is that further advances in medical science and disease prevention will mean these dependency ratios could in reality be much greater challenges in the future. Living to 100 might be commonplace for today’s millennials. Their children may expect to live to 120. But the question of how world economies – which were never designed for this demographic pattern – are going to afford to support societies where there will be nearly as many people aged 65 plus as there are of working age, is a big one and it’s unanswered.

Maybe in the future old age will no longer be an ambition but something for which we need a cure?

Old, poor and lonely: the other side of the ageing story

Much is being made of opportunities for retirement living and aged care due to our ageing population. For those who retire with a healthy balance sheet there are increasing choices within a fast evolving ‘for profit’ industry. But the reality for a majority will be ongoing dependence on the aged pension and insufficient government or non-profit places to accommodate them.

The basics of our ageing population are easy enough to understand. First, there will be more of them – with Australians aged 65 plus the fastest growing cohort in coming years, rising from 14% of the population now to around one in five Australians by 2033. In terms of actual numbers, the current estimate of around 3.5 million Australians aged 65 plus will rise to around 6.3 million in the next 20 years – an increase of around 2.8 million people. I will be one of them.

For the aged care and retirement living industry, this is a future demand profile virtually immune from market cycles. You can’t stop people aging, and as we live longer, there will be more people ageing than ever before. Life expectancy in 1970 was 70 years of age. It’s now 82, and still climbing. If you are currently aged 65, you can (on average) expect to live another 19 years for males, and 22 years for females, because ironically the longer you live the greater your life expectancy becomes.

In response, sections of the retirement living and aged care industry are transforming rapidly. What was once a cottage industry run mostly by charitable, religious or non-profit groups, is rapidly evolving into a very professional industry run by private or publicly listed businesses, looking for greenfield expansion, acquisition or redevelopment opportunities to grow portfolios and improve operational efficiencies. Many of these businesses are well positioned for ongoing growth in scale and profits and will be cheered on as market darlings by investors and an increasing number of people reliant on their growth for work. Including me, hopefully.

At the same time it is easy to lose sight of a more sobering market reality. Expansion in the aged care and retirement living industry is being led by businesses who are catering in the main for the upscale end of the market. In other words, old people with money. A significant proportion (and perhaps a majority) of old people won’t have the funds needed to enter private retirement living or aged care, or if they do, their funds might be depleted because they live longer than they budgeted for. Don’t get squeamish on me at this point, because ageing is all about economics and budgets.

So here are some financial angles on the ageing demographic which reveal a worrying future policy landscape for those not at the premium end of the retiree market.

Today, roughly one in four people aged 65 and over are either renting their own home, or still paying off a mortgage. The proportion who own their own home outright is falling, and based on falling rates of home ownership amongst Australia’s current generation of 30 somethings, the proportion who own their own home by say 2050 will be significantly less.

Then there is superannuation. The average current super balance of someone aged 60 plus and not yet retired is just $95,000. The proportion of people aged 65 and over who have no superannuation at all is around 65%. Yes, this is changing as more superannuants retire, but superannuation balances are not what you’d think. The average superannuation balance of someone aged between 70 and 74 – the average age of entry to a retirement village – is just $102,000 but this plummets to just $38,000 for the 75 to 79 age group. Or put another way, the number of Australians aged 50 and over with a super balance of more than $500,000 is just 5%.

The biggest asset most current or future retirees will have is their own home, but remember that one in four are either renting or still paying off a mortgage. There are 13.5% of Australians aged 65 plus who are renting their own home. For those who own their own home, the average value of this (in 2012) was around $500,000.

In terms of incomes, two thirds of people currently aged 65 plus have a weekly income of less than $400. This is heavily influenced by the age pension, which one in four current retirees receive at the full rate (being $430 a week). A further quarter receive a part pension, while only a third are self-funded. Remarkably some 18% of retirement age Australians are still employed, but whether this is of necessity or by choice I don’t know.

So the economic picture here is one where a significant proportion of Australian retirees, and by definition also those who will need aged care, generally have insufficient assets, savings or financial means to fund the lengthening number of years where they won’t have an income and where their costs of care and accommodation will increase.

This is a market segment no one seems to be talking about. I presume there is an assumption that government or religious/charity/not for profit groups will continue to cater for this market. But the numbers are such that many non-profit groups won’t have the financial resources to meet this growing demand as many are struggling with financing existing operations, let alone expansion. Which leaves the government, meaning the taxpayer, and the reality here is that there will be increasingly fewer taxpayers of working age relative to the number of aged dependents, meaning higher taxes. Sorry hipster generation, it’s looking pretty ordinary for you.

So what’s going to give? Will we see a return to multi-generational housing where grandparents, parents and children live under the same roof? There will no doubt be some of this, but it’s hard to see how our social mores will change to the degree needed to relieve pressure on demand. What’s really needed is an affordable housing solution for retirees and Australians in need of aged care, for whom the commercial part of the market will remain beyond reach.

Given our wholesale failure to address housing affordability problems for working age Australians and young families, it’s difficult to be positive about any meaningful solutions being found for the other end of the age spectrum. Keep that in mind when you next look at those marketing images of healthy looking silver haired retirees with perfect skin, wearing pastel coloured cashmere jumpers and big smiles (and their own teeth), holding hands as they walk on the beach… they are far from reality for the majority.

Aged care & retirement living: are they immune to market and economic cycles?

Much has been written about the ageing of our population but less is known about the implications for housing and caring for them. In the past, this has been left to not-for-profit groups like religious organisations or charitable institutions and a handful of smaller private operators. But the numbers that are coming in terms of ageing Australians will render this cottage industry approach entirely obsolete. Demand is likely to be so strong, for so long, you have to ask if this is one part of the property industry that will be immune from cyclical gyrations because it will be one long upswing lasting more than 20 years.

If you were born in 1900, you could expect to live on average to around 50 years of age – less than today’s retirement age. If you were born in 1945 that rose to around 68 years of age. If you were born in 2009 you can expect on average to live to 79 for males and 84 for females – a good way past retirement age. The United Nations has estimated that every second child born in a developed economy from 2000 onwards could live to 100. So one in two of today’s children in Australia may somehow have to work out how to live without an income for some 35 years. Good luck with that.

They - and today’s ‘baby boomer’ generation - will also need to find somewhere to live – and this is where the property industry comes in. There are two types of product and generally two types of operator servicing the needs of the 70+ population: retirement living (also known as independent living) and aged care (once called nursing homes). Neither are for everyone and take up rates in Australia are still low by developed nation standards. However, even based on those low take up rates, demand is going to quickly outstrip supply.

Leading Aged Services Australia is the peak body representing aged care providers. They estimate that there will need to be an extra 83,000 new aged care places in Australia in the next nine years alone. Let’s adopt an average of 80 beds per facility which is typical of most existing aged care operations. That equates to 1037 new aged care facilities for the next nine years, or around 115 per annum for that period. Mostly they will be needed in the larger capitals. Some research I coordinated for Calibre Consulting shows that in Brisbane, Sydney and Melbourne will all need something like 20 to 25 new facilities each year to 2031 and probably beyond. Each place costs roughly around $250,000 in development costs (building plus land plus other charges) so each facility of 80 beds will on average be around $20million. The 115 new facilities needed nationally work out to an annual development budget of $2.3 billion. And this is just to keep pace with the demand we know is coming, without any increase in take up rates. And these are only the development numbers for aged care. Add in the retirement living market and you could potentially double that. Or maybe more.

The thing about this market is that demand is fairly predictable. You will not find an aged care or retirement living operator complain about a lack of demand. They will however complain about high operating costs and high site costs, if they can find the sites. After all, it’s one thing to reel off statistics about projected demand but the industry still has to find places to develop these facilities. And because most seniors (and their families) want to age in the communities they are used to living in, this does not mean they’ll be interested in shifting out to some bleak cow paddock on the urban fringe. Nor will they (or their families) be interested in trotting off to some aged care facility that has all the charm of a 1930s insane asylum, or if a retirement living facility, all the design flair of a post- war workers housing scheme, complete with vinyl floors.

Not all of them will be able to afford to be choosy of course. But there will be enough of today’s boomers with enough cash to support a large and growing industry that will appeal to their needs and advanced tastes.

(What though will happen to today’s generation of kids? They are renting longer, entering the housing market later and with much higher mortgages. They are projected to retire with a mortgage and will need to live that much longer without an income past retirement. Today’s boomers are often multiple property owners having grown up in a post-war era of extraordinary opportunity. Today’s millennials by contrast, when it comes their turn to find a retirement living or aged care product, may not have the assets to fund their lengthy senior years. For them, is it time for Logan’s Run?)

The other aspect of demand in this market is that it is typically unrelated to market or economic cycles. True, most people entering a retirement living product do so by selling their family home, and they will try maximise the price for that by waiting for the right time to sell. But ageing has its own immutable clock, which doesn’t wait for market cycles - especially if people suffer from loss of a partner, a fall, or stroke or rapid onset of dementia or other debilitating conditions that can’t be forecast. They need new living arrangements, or they need care, and they need it now. Family members are often left to find somewhere and they need to find it quickly. Market or economic cycles are immaterial to finding suitable places for loved ones to live in. And there will be an increasing wave of seniors in precisely these situations that will drive a long upswing in the aged care and retirement living market.

How will the industry respond? Here are a few thoughts.

Consolidation by merger or acquisition is inevitable. The top two or three largest operators in the aged care market, for example, control only around 5% of the market. Contrast that with retail where the two majors receive 80% of the retail dollar. There are literally thousands of facilities and operators nationwide and many of them with only one or perhaps two facilities. They will not survive, except perhaps for the elite end of the market, because they do not have the economies of scale to provide cost-efficient operations. Everything from the cost of meals to laundry to staff:patient ratios counts and larger operators will win out.

There will also be more professionalism. No disrespect to the many well-meaning and long standing charitable and religious providers but in terms of property development or redevelopment, many don’t have the skills. Their business models were based on noble but often uneconomic commitments to provide care at ‘affordable’ prices. Their cash balance sheets are often incapable of supporting new development to meet demand even though they may be paper rich in land assets. I suspect many will start joint venturing with private developer-operators to fund their future – indeed some are already doing so.

Planning schemes and community attitudes must also change. There are virtually no undeveloped sites suitable for retirement living or aged care facilities in areas of our cities where demand is most acute. Under-utilised land like shopping centre carparks or even that second school oval are going to need to be available to meet demand. Otherwise we may as well put up signs in our cities saying “hey oldies, thanks for building all this but you can piss off now you aren’t welcome anymore.” Height restrictions will also need to give way to provide for higher density facilities especially in areas where land or sites are particularly scarce. The NIMBY attitude of some community groups that I’ve seen actively oppose new aged care facilities is nothing short of disgraceful, and the politicians giving them encouragement should be given an advanced ageing pill so they know what it’s like to be the wrong side of 80 with nowhere to live and no going back.

The other thing that will change dramatically is design. The next generations will demand higher standards that more closely resemble a Balinese resort. Or their children will demand it for their parents. We are all becoming increasingly spoiled and those with the money will want to remain spoiled in their senior years. Already we are seeing cinemas, resort style pools, quality cafeterias and dining areas with high standard menus, hairdressers and beauty salons, resort style landscaped gardens and a host of other features that bear no resemblance to the ‘retirement homes’ or ‘nursing homes’ of years past.

All this presents challenges and the prospect of enormous change for the industry on a scale that is hard to imagine. But that change will come because it is being driven by a tide of demand that is irresistible and inevitable. 

Quite possibly that wave of demand is something that for this part of the market at least, economic or market cycles won’t be the main drivers: demography will.

Will you still house me, when I’m 64?

In the song by the Beatles, the worry was about being fed and needed at 64. Things have changed. If the Beatles wrote those lyrics today, the worry instead might be about housing.

Australia’s ageing population is an inevitability.  As our replacement rate falls (we’re having fewer children per family) and life expectancy extends, the proportion of over 65s will double in 40 years. In raw numbers, there were 2.5 million over 65s in 2002, and this will rise by 6.2 million in 2042. That’s an extra 4 million in this demographic. Have we given enough thought to where they’re going to live, and what styles of housing they might prefer?

There have been a number of developers who have understood the looming significance of Australia’s ageing population, and who have sought to supply the ‘retirement living’ market with product that suits. At one end have been the glitzy apartment style residences in inner city locations, while at the other have been the aged care ‘homes’ provided for those in need of access to nursing care or medical assistance, or at least the reassurance of it being present.

Running parallel with the provision of retirement living or seniors living projects has been an assumption that, once ready to abandon the family home of many years, seniors will be happy to move across town and relocate to the facilities that are available. (Perhaps this is hangover from the days when retirement or aged care living was provided on Stalinist lines: our oldies were forcibly shuffled off to some retirement centre well away from the rest of the community they grew up in. A sort of gulag for grumpies?)

But what if seniors simply want a change of housing style within their community? What if they don’t want to move across town to the only available accommodation because they would prefer to continue to live in the neighbourhood and community they have spent a large part of their lives living in? They may want to continue to shop with ‘their’ local butcher, visit their local supermarket, newsagent, bank branch (if it still exists) and generally remain connected to the people and places that they’re familiar with – including (quite possibly) members of their family, children and grandchildren.

Meeting that need in the future is going to be close to impossible unless planning schemes (old fashioned zoning laws) adopt a more flexible approach. Flexibility will be needed because most of the existing suburbs of our major population centres are largely built out and will require retrofits and redevelopment of existing stock to accommodate senior’s housing preferences. Generally, the only tracts of undeveloped land capable of meeting seniors housing needs tend to be on the outskirts and while there’s nothing wrong with fringe development, it seems unfair to expect seniors to relocate across town to regions they’re unfamiliar with and to alienate themselves from their community simply because supply side mechanisms (controlled by planning schemes) don’t permit choice.

Further, the built out status of our ‘established’ suburbs – as they now stand – is something that much planning law seems to want to preserve for time immemorial. It’s a little bit like imagining that someone has declared the existing housing mix and styles a fixture of permanency: let’s put a giant glass dome over it all and call the city a museum – because we don’t (it seems) want anything to change.

But if we are to allow Australia’s seniors to ‘age in place’ and to ensure our markets provide choice, it’s going to mean some things will need to change, given the likely levels of future demand. The fastest growth of aging populations will be around our ‘middle ring’ suburbs and given the overwhelming preference to ‘age in place’, it is these suburbs that are going to have to change if those needs are to be met.

What will that change look like? The psychology of seniors in years to come – even today – is going to be different to those of previous generations. They’ll likely be more active rather than sedentary. The family home that’s served them to this point may now be simply too big for their needs, or contain too many stairs (the artificial hip or knee doesn’t like too many stairs). Their future housing needs will vary widely - some will be happy with apartments in high to medium density developments (elevators to their level of living means no stairs) while others (generally the majority) will prefer smaller, detached or semi-detached, single level dwellings. Many may want a small yard or garden (or at least a large balcony or terrace if in a unit), and perhaps want to keep a small pet dog or cat. They may want a spare bedroom for visitors or for babysitting grandchildren. They will probably prefer to be close to shops and near to public transport. And the majority will want to find something of that nature generally within the same community they’ve been living in. It is unlikely they’ll be searching for the ‘retirement home’ style of assisted care living until they’re well into their later years when their choices will be more limited.

Their problem will be that developers will struggle under current planning schemes to get approval for semi-detached housing designed with seniors in mind, if it means amalgamating some detached residential dwellings near local shops, because that land use is highly protected. They will struggle to gain approval to convert a large single site into medium or high rise in areas near local shops or transport, because the community will likely object – particularly if it’s in a neighbourhood where low density prevails (typical of most of suburban Brisbane). Advocates of TOD style development might now be shouting at this article that ‘TODs are the answer.’ That might be so, if only one single TOD had been delivered during the past 15 years we’ve been talking about them. Plus, the majority of proposed ‘TOD’ style development areas largely surround inner city transport nodes. Not much use if you’re in Aspley and want to stay there. And of course there’s the reality that multi level apartments are much more costly to develop and construct than the cottage building industry’s approach to single level, small detached housing.

The changes needed need not be dramatic, and subtle changes to land use surrounding existing retail or service centres in middle ring suburbs ought to be able to be achieved with minimal planning fuss. (It is still possible to imagine something being done with minimal planning fuss, but very difficult to point to any actual examples. Still, hope springs eternal).

The changes could allow (for example) for some amalgamations of larger lot, detached post war homes into higher density cottage-style dwellings on a group title, still single level and with low construction costs. A 2000 square metre amalgamation could in theory provide 10 such cottages, with private garden space and minimal likelihood of community objection. The key would be to keep regulatory costs down, so punitive development levies would be out of order. After all, the infrastructure already exists and seniors tend to be much less demanding on utilities or services than young households. (Have a think about how little garbage they generate, or how little water they use as an illustration. It would surely be unfair to tax seniors in this type of housing for infrastructure upgrades under the circumstances?).

The traditional ‘retirement home’ or ‘aged care’ model of seniors housing is still going to be needed, especially as people require more frequent or acute care in their later years, and become less and less independent. But there will be a good 10 to 15 year period for people for whom the family home no longer suits, and who aren’t yet ready for ‘God’s waiting room.’ How we accommodate this coming bubble of seniors who want to age in place and continue to live independently, and how planning schemes will allow markets to provide choice and diversity, is something that perhaps should be a policy focus now.