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?

We are working less while living longer

The ageing of our society raises a host of difficult issues, most of which are studiously avoided by our current crop of populist political leaders. So while they’re building up the courage to confront some ugly economic realities of the ageing of our society, I’d like to add another consideration. It’s a set of numbers that aren’t often discussed but which add another dimension to the problems of ageing.

First, a quick recap on the ageing numbers. Australians aged 65 and over are the fastest growing age group in the country. There will, in the next 20 years, be another 2.8 million of them. Part of the reason is that we’re living longer, as life expectancy grows. Living longer is something we all wish for, but we’re yet to seriously work out how we can afford it.

Here’s the sobering picture which we all need to understand. Keep this in mind the next time some new medical advancement is announced which means we’ll likely all live a little longer still.

Take someone (the following numbers are based on males) who was born at the turn of the last century, around 1900. Their life expectancy was on average only 51 years of age. They went to school but mainly left school by the time they were 14, or even sooner. Then it was straight to work. With an average life expectancy of 51 years, most pretty much died on the job after working for 37 years. ‘Retirement’ was something largely unheard of, and certainly not something funded by welfare: families looked after their elderly until death. This generation spent, on average, 73% of their life in work.

Jump ahead to someone born in 1950 – a classic ‘boomer.’ Their life expectancy by now averaged 66 years. They attended school and many left at age 14, and retired at around 60. This gave them 6 years of ‘retirement’ and 46 years of work. They spent 69% of their life at work.

Jump again to 1975 and life expectancy rose to 69 years of age. But people born in this era were more likely to stay at school until say 17, to finish high school. They retired at around 60 and had 9 years of retirement before death. This generation spent 43 years at work – less than the previous generation – or 62% of their life.

And now to the millennials. Born in 2000, they can expect to live to 76. They will be at school and probably post school studies (and staying at home) to around 22, maybe longer if you throw in a gap year. If they still retire at age 60, they will have 16 years of retirement. They will work for only 38 years or just 50% of their life.

We have gone from generations who spent much of their life working (and thus supporting themselves and paying taxes) to a coming generation who, by living longer and staying as dependents for longer, will only spend half their life at work.

What is our plan for funding a life where half of that life is outside work? Even today, we are confronting a wave of retirees with minimal superannuation balances, certainly insufficient to fund their way into commercial retirement living or aged care housing. The majority of retirees, even today, will rely on the pension to some extent.

Coming generations are working less and - thanks to idiotic levels of housing affordability - postponing entry into the housing market, if at all. They are even postponing children, with the average age at childbirth rising somewhat. This generation will have had compulsory super for most of their working lives, but those working lives will only be 50% of their time on the planet. And they may not be retiring with a home that is owned outright, but retiring instead with a mortgage. Or no home at all.

So Australia, tell me this: if we are to preserve our standards of living and quality of life, what’s our financial strategy for doing so? By working for falling proportions of our time on earth, we are going to struggle to fund our own future retirement – let alone pay sufficient taxes to maintain infrastructure and provide funds for pension support for the many who have been unable to fund their retirement. Do we simply suggest that seniors have to work longer? This is about the extent of any wisdom from Canberra in recent years. But try telling that to a 60 year old on the job market. There are only so many Bunnings jobs to go around. 

It strikes me that longer lifespans is a double edged sword. While we may collectively want to celebrate the idea of living longer on this earth, we need to have a very serious discussion about how on earth we’re going to afford it. 

Some themes for 2016?

What will we be reading about this year? What mega trends will dominate discussion? What markets are going to shine, and which ones will wane? Everyone has their own ideas on a topic like this, and below are some of my suggestions. Hope you all have a good 2016.

Suburbia.

I’m declaring 2016 the Year of Suburbia! Why? Because I think the penny will start to drop that the CBDs and inner cities are not the be all and end all of what it means to be ‘urban.’ The suburban and even peri-urban economies of some large urban areas have been growing stronger than their inner cities, and the ‘burbs’ are also where most of us continue to choose to live and raise families. I know this runs counter to trendy policy debate which would have us believe that everyone wants to live as close to the CBD as they can, because (supposedly) this is where all the jobs are. But the facts say otherwise (though few bother with the facts these days). Later this year, the MIT Center for Advanced Urbanism is running a conference on the theme ‘The Future of Suburbia’ and they have launched a multi-year project ‘Infinite Suburbia’ which will examine aspects of suburban improvement. I’ll be relaying as much of that thought leadership work, plus ideas from other sources, as I can. Watch this space. 

Apartments. 

There is going to be oversupply in some key markets and it but will increasingly emerge that the flood of one and two bedroom stock is not what was wanted by residents, but rather what was saleable to investors (and their advisors). Rising vacancies and falling values are going to be inevitable as supply and demand rebalance over time. The boosters who claimed that ‘Australians have abandoned the dream’ of a detached suburban home in favour of an inner city micro apartment will no doubt contort themselves with retrospective explanations for settlement failures and rising vacancies – neither of which would happen if the product was supposedly so much in demand in the first place. This at least will prove entertaining. 

Housing prices. 

The Sydney market is going to cool. It has to: sustaining the sort of irrational exuberance we’ve seen in recent years over the long term just doesn’t happen without a hangover to follow. Demographia’s annual survey of world housing markets puts Sydney at the global pointy end of plain nasty when it comes to affordability, at 12.2 times incomes. Only Hong Kong is worse. Pundits who are predicting that as Sydney cools, property appetites will shift to markets that haven’t tested the limits of sanity – like Brisbane – may be disappointed. Queensland’s economy is drifting along in the doldrums, ranked by Commsec as only marginally better than South Australia or Tasmania. Oh, the shame. Without a strong economy, the property sun will struggle to shine brightly, with some regional exceptions. As always, the media obsession with housing will mean we’ll continue to read a lot on this subject. Much of it rubbish. 

India. 

India and talk about India I am guessing will increase this year as markets look for ‘the next big thing.’ And India seems to have it: their population will soon overtake China’s, and their economic growth is forecast by the IMF to reach 7.3 per in 2015-16 and 7.5 per cent in 2016-17, which is more than China’s. Their GDP per capita has a long way to go – it is currently only around US$1,500. China by comparison is around $7,000 and Australia around $50,000.  So maybe the only way is up? They have a western democratic system (much of it, like ours, dysfunctional) and a Prime Minister in Narendra Modi who by all accounts is a good leader and keen to see the economy grow. Which should mean they will need the things Australia is good at – low value add resources which are just waiting to be dug up and sold to someone who knows how to add value. Expect to read more of what India means to Australia in coming years. 

China. 

We’ve become obsessed with China and that’s unlikely to change much. Reports of ‘China’s slowing economy’ are misleading but that never stopped our media, or dimwit analysts in search of a headline.  China’s economic rate of growth has slowed to a reported 6.9%. But this is still growth. It is not a slowing. It may be the slowest rate of growth in 25 years but it is still growth. The global growth forecast, by way of comparison, is just 3.4%. The USA – the world’s largest economy – is forecast to grow at 2.7% and Australia by only around 2%. China’s growth forecast for the year ahead is 6.3%. I’m sure if Australia was growing by even 5% we’d be very happy little Vegemites with roses on our cheeks, but it seems we are paralysed by talk of China’s rate of growth slowing to over 6%. That’s like telling someone doing 100 kph they’re going too slow when you’re only doing 50kph yourself. Logical? No.

Oil. 

It recently fell to below $30 a barrel and is now climbing to the mid $30s but that’s a long way down from over $100 less than 12 months ago. So whatever happened to all that ‘peak oil’ talk and where are those forecasters now? It’s hard to see things staying this way, despite what the hopeful and the faithful believe might happen with renewables. Oil is used in everything, from fertilizer, to plastics, to energy. Plus it’s an unbeatably efficient form of energy and the world seems to have plenty of it, and the ability to find more once the price gets to around $60 a barrel. I’m no expert on commodities but the price of something so essential to our economy is going to have to figure prominently in the news media as the year unfolds, surely?

Ageing.

Demography is destiny. In Australia, we are still to confront the realities of how our ageing population is going to impact on us all. More retirees – the majority on limited incomes or who are pension reliant – being supported by relatively fewer taxpayers, is not a good formula but it’s what we are faced with. Plenty of businesses will find opportunity servicing the upper income end of the retiree and aged care cohort but few are talking solutions for the majority on lower incomes for whom commercial solutions are simply unaffordable. There will have to be significant changes to retirement policy and tax treatment of the family home for pensioners will probably become part of that. Expect this debate to become increasingly prominent as taxpayers resist tax increases to pay for pensioners and pensioners vehemently resist any dilution of their benefits. 

Immigration and population. 

Angela Merkel looked at Germany’s shrinking workforce and population predictions and opened the door to arrivals on an unprecedented scale. Was she hoping to plug a workforce gap? Will Australia likewise look to importing a solution to its need for more working age taxpayers (and maybe in the hope that some rapid fire population growth will stimulate the economy) by increasing immigration intake? The ‘big Australia’ debate never really went away and perhaps it will make itself felt again this year. Given our strong views both ways, and the racial nerve that often flares, this is a topic that will at least bubble away, occasionally surfacing in a blaze of heated opinion. 

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.

The world in the year 2100

In another 85 years, the world will be a very different place. Some nations are already shrinking and have much further to go, while others will grow dramatically. The world powers in economic and military strength are going to change. New stars will rise. Old stars will fade. So I thought it might be interesting to see how Australia might look by the year 2100, compared with some of our major trading partners or world powers.

Think how different the world was 100 years ago. The United Kingdom was an undisputed world power with a global empire that included Australia. The United States was not yet remotely a world power. Russia was still ruled by the Tsars, China was still a largely feudal empire and Japan was ruled by Emperors. From that period to now, the world population has risen by over 400%, with the fastest period of growth in the mid-1960s to 1970s.  Population growth in most advanced economies is now slowing to below replacement rate, with aging populations and fertility levels falling to less than half their 1960 levels. The clever people at the UN Population Division crunch the numbers on a regular and very detailed basis and their predictions in the past have been pretty much spot on. According to these experts, and assuming no Third World Wars or global pandemics, here’s a glimpse into the future…

 Australia’s population will rise from around 24 million now to about 33 million by 2050 and to 42 million by 2100. That might sound like a lot but an extra 20 million of us over the next 85 years is a minor statistical error in global terms, although given recent trends we could be a world stand out with 85 Prime Ministers in as many years.

What many people don’t seem to appreciate is that China’s population is at its virtual peak, and is about to start shrinking.  China will peak at around 1.415 billion people in 2030 and by 2050 there will be nearly 70 million less Chinese than at this peak. By 2100, there will be 372 million fewer Chinese than today and over 410 million less than the peak in 2030. They are also aging faster than their workforce can keep up with, although on the plus side, there is still plenty of room for productivity growth in China. Their current GDP Per capita is USD $7,500, compared to nearly USD $62,000 in Australia. (World Bank data).

Japan is forecast to have a steadily declining population. By 2050, it will have shrunk by 19 million people (that’s getting close to the current population of Australia) and by 2100 it will have shrunk by more than 43 million people. Those inflated real estate prices might be under pressure, which could do all sorts of things to the economy’s capital backing. They’re already reasonably productive and with a rapidly aging population, it looks like the land of setting – not rising – sun for them.  

Germany’s population is also in gradual decline. There will be roughly 5 million fewer Germans by 2050 and by 2100 there will be 17.5 million fewer Germans than today. All those empty beer halls! Little wonder the Germans are happy to accept large numbers of Syrian refugees – they have a highly productive economy but will have fewer people to keep it running.

India takes over from China as the world’s most populous nation within the next five years or so. By 2050 they will have added nearly 400 million more people. Their population peaks in 2070 at 1.75 billion (give or take an Australia or two) and declines to around 1.66 billion by 2100 – which is still some 355 million more than today. India has massive potential for productivity growth with a current GDP per capita of only USD $1,630 – which is 2.5% of Australia’s. They have a western democratic system of government but seem to have adopted the least efficient aspects of western bureaucracy with few of the benefits. If they can resolve their governance failings and modernise their economy, India may well be a new world super power by 2100. If you have kids in primary school today, maybe getting them to learn the Hindi language is not a bad idea. At least they’ll be able to follow all those Bollywood movies.

Our northern neighbour Indonesia has ten times Australia’s current population and this will rise by another 64 million by 2050. Their population will plateau from around 2060 and by 2100 will have decreased marginally from their 2065 peak to 313.6 million. Indonesia also has potential for productivity growth with a per capita GDP of only USD $3,500 but it’s not clear yet what is going to lift their economy nor how they are going to go about it.

Dear Old Blighty just keeps chugging along with its population steadily rising from todays 64 million to just over 75 million by 2050 and reaching 82.37 million by 2100. By this time there might be enough of them to field a decent rugby team. They’re a strong economy with per capita GDP of USD $45,600 but this is highly concentrated on London. Any glitch in London’s world financial HQ status could spell all sorts of problems in the future.

The United States will add another 100 million people by around 2070. (See my friend Joel Kotkin’s book ‘The Next 100 Million’ for what this mean for the USA.). Representing a third of the world’s economy, it’s difficult to see how the USA will lose any of its economic muscle over time. With a GDP per capita of $54,630, they just need their economy to begin firing again and for US consumers to open their wallets to stimulate rapid economic recovery – not just in the US but countries that rely on it. Another friend Dr Doug McTaggart has always maintained that the health of the US consumer has a far reaching impact on world economies and I for one believe him.

Do svidaniya comrades. Russia will shrink by 15 million people by 2050 and by 2100 will have shrunk by 26 million – equivalent to shrinking by a whole Australia today. But our Russian friends only let go of communism in relatively recent times and have much further to go in modernising their economy. They have abundant natural resources and with a per capita GDP of around USD $13,000 it isn’t hard to imagine the Russians still remaining an economic and military power by the turn of the next century.

The country that records the most astonishing growth over the period to 2100 is Nigeria. The forecasts are that the current population of 182 million will rise to over 398 million by 2050 – that’s double – and by 2100 will reach 753 million – which is almost double again and more than four times their current size. Many of the African nations show enormous growth over this period but Nigeria is the stand out. They have low productivity (per capita GDP USD $3,100) and often unstable systems of government. It’s difficult to see this being even a moderately prosperous future, unless those Nigerian loan scams are actually making a lot more money than anyone thought. The whole African story is something worthy of a lot more detailed study because that continent is going to continue growing at rates which far exceed the rest of the world. Something for another day.

What’s it all mean?

The only thing that’s certain is that the world economic order we know today is going to be vastly different in the future. Demography is going to play a significant part in that but, in reality, it’s impossible to predict much of anything beyond the likely population numbers. Will countries like Nigeria follow the Chinese path to rising economic prosperity, or fall further into poverty? Who knows? There’s another metric in all this which is aging and those countries with a younger demographic may well fare better than nations that find their relatively small working population struggling to support a much larger, dependent aged cohort. For nations like Japan, which is both shrinking and aging and with no immediately obvious path to lift economic output, this isn’t a pretty scenario.

And Australia? I think Donald Horne summed it up nicely in 1964: “Australia is a lucky country run mainly by second rate people who share its luck. It lives on other people's ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise.”

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.

Never mind the bollocks! (Growing old disgracefully)

If you were aged 25 when The Sex Pistols first crashed onto the music scene in 1975, you’ll be 65 years old next year. This isn’t so much a lesson in demography but one of attitude. I can’t imagine this generation of ageing Australians wanting anything to do with the style of retirement living or aged care we’ve dished up in the past.

The endless statistics now being churned out on our ageing population are becoming a blur. The ABS will tell you that the proportion of us Aussies aged 65 and over in the 1970s was just 8%. Within a decade or so, that will rise to one in four of us. And the Productivity Commission’s report of late 2013 will tell you that “the population of people aged 75 or more years is expected to rise by 4 million from 2012 to 2060, increasing from about 6.4 to 14.4 per cent of the population…”

We get it. There will be lots and lots more old people, supported by fewer people of working (and tax paying) age.

Where they’re all going to live has large parts of the property industry belatedly starting to focus on the response.  Again according to the Productivity Commission: “Total private and public investment requirements over this 50 year period are estimated to be more than 5 times the cumulative investment made over the last half century, which reveals the importance of an efficient investment environment.”

So, lots and lots more investment is needed, a lot of which translates into built form. In other words, lots more housing for oldies.

This usually translates into two types of market response – retirement living, and aged care. Some organisations provide for both but many (surprisingly to me) opt for either one or the other.

The retirement living side is defined by housing designed for seniors who remain active, mobile and capable (mainly) of looking after themselves in independent living. Here there are some very big numbers. According to research presented by villages.com.au at a recent PCA event, in the short space of time from 2015 to 2018, there will be a requirement of $7.3 billion new capital required to meet demand from this market.

That’s billion with a ‘b’ people, and in the space of just three or four years. And that’s presuming the current take up rate of 5% of people who are eligible for retirement living options and who actually take up the option, remains the same.  If the rate at which Australians eligible for retirement living actually making use of it rises to 8% (a more globally typical level), that $7.3 billion gets exponentially bigger. Some research presented by Stockland at the same event pointed to a $35 billion capital requirement at current take up rates by 2040. As I said, very big numbers.

The residential aged care market - really a better term for what used to be called ‘nursing homes’ – is just as daunting in terms of forecast demand. According to Bentleys Accountants, we will need 9,000 new residential aged care beds per annum for the next ten years. This translates into around $20 billion of new construction, just to keep pace with demand, in the next decade. This is in addition to what’s needed in retirement living.

So there are the numbers, or some of them at least, which demonstrate how big this wave of demand is about to get.

But what I don’t hear much about – although some savvy operators are onto this – is the question not of numbers but of attitude.

You just can’t presume tomorrow’s 70 year olds will resemble anything like your grandparents may have been at 70. For one thing, they’ll be fitter and more active. The Sex Pistols Generation – if they haven’t died already from drug abuse in their early years – will have access to the most sophisticated health care ever, and the means to pay for it.

The idea of leaving the family home for some low-grade retirement living unit that once happily housed prior generations of retirees just won’t appeal. Their demands and standards will be completely different.

To attract this market, switched-on retirement living developers are creating product which is more closely aligned to the tropical resorts our generation of punks have probably been frequenting in recent years.

They may have been singing ‘no future’ in their youth but it turns out most had a pretty good future, and accumulated housing assets and opportunities for travel as they went. Unlike today’s ‘generation rent’ who may retire still with large mortgages and low savings, our punk generation are more likely to own high quality homes outright, matched with healthy savings balances.

Just because they’re getting old, they’re not going to tolerate being treated as if they’re somehow deficient. They have enjoyed high standards of living and they aren’t about to compromise. Indeed, I’m told that one of the biggest hurdles faced by today’s retirement living providers, even when the quality of product is better than a Balinese resort – is the stigma associated with the term ‘retirement living.’ Maybe ‘rock n roll living’ might have more success?

A similar revolution in product is happening at the aged care end. Pokey rooms, dim corridors, grey vinyl flooring and the depressing smell of hospital antiseptic will have the older punks doing 180’s in their wheel chairs and disappearing.  Oldies in need of higher levels of care will still want that delivered in a higher standard environment than previous generations, or no deal. More natural light, better quality facilities, personal services and overall amenity will be in demand and those with the means will be prepared to pay for it.

And if our geriatric punks are suffering from dementia or other forms of debilitation, it will be their families who insist on higher standards on their behalf.

There will be plenty who don’t have the means to pay of course, and this is where government will inevitably find itself forking out truckloads of taxpayer cash in the future. What if even the people without the means and without the savings have higher expectations in the future? No wonder Joe Hockey’s worried.

At the root of this change is a massive change of attitude. Previous generations of elderly went through life with little in the way of assets and just ‘made do.’ They endured parsimony (even self-imposed) and were grateful for the basics. First the baby boomers, then the punk generation, enjoyed much higher standards of living and personal wealth. Not only that, their cultural experience was one which challenged social norms. Prior generations were more respectful, more compliant, and less demanding. Boomers and punks are more demanding, expect and want more, are less tolerant of conforming to social norms and more likely to demand personalised approaches to care rather than institutional ones.

We may all be getting older at a faster rate, but we’re also going to be handful once we do. Myself included.

God save the Queen. 

Older not wiser

Australia has an ageing society and while living longer is good news for many, there are some major economic issues we need to understand to avert a huge problem in the years to come.

According to a recent UN report, roughly half the children born in developed and developing economies after the year 2000 will live to 100. Australia is no exception to a worldwide trend of increasing life expectancy. We are ranked equal fourth in the world, with a current average life expectancy of 82. The number one spot is shared by Japan, Switzerland and San Marino, where the average is just another 12 months (83 years).

To put this into some perspective, the global average life expectancy in the early 1900s was just 31 years. In early modern Britain (from 1700 to around 1900) is was somewhere between 25 and 40 years. In Classical Rome and Greece, it was 28. Most of you reading this now would have been long dead after 40 if you’d been borne at any time prior to the late 1800s.

But modern diets, standards of healthcare and higher quality of life in developed economies mean that we’re all now living longer, on average. The only problem with this is that we’re still working on a pre-industrial model of employment, with an expectation that we’ll all retire sometime around 60 or 65. So if we’re going to start living on average well past our 80s, that’s going to mean a longer period without an income. For children being born today who might live to 100, that could mean a working career of 40 years, and a retirement period also of 40 years.

Compounding the basic maths of this problem for Australia is the baby boomer ‘bubble’ which has tilted our demography toward the older end of the scale. This means there are fewer and fewer people of working age, paying taxes to run the country, and also (somehow) to support an increasingly geriatric population.

Few of us it seems believe that superannuation is going to come anywhere close to supporting ourselves in retirement. Repeated surveys reported in the media point to a sceptical view of even semi prosperity in retirement. And the high cost of housing could make this all potentially much worse for Australia for two reasons.

First, fast forward 20 or 30 years. Fewer Australians are going to own their own home on retirement. At present, roughly 78% of retirees own their own home at retirement age. This report tips that could plummet to just 2% by 2050.  That could be a touch on the alarmist side but the consensus of these sorts of forecasts tends towards a gloomy view. Rates of ownership are falling and, as policy makers continue to fiddle with failed planning dogma, there’s little prospect of that changing. So at the oldies end of the scale, not only are there going to be many more of us aged over 65 (there were 2.5 million over 65s in Australia in 2002 and this will rise to 6.2 million in 2042) but for the majority of us, we may no longer even own the home we live in by the time we stop working. That’s a pretty fundamental component of today’s retirement planning up in smoke.

Second, at the younger end of the scale, the prohibitively high cost of new entry level housing is seeing more and more young people rent rather than enter the market. I am talking particularly here of new house and land packages on the urban fringe, the supply of which has been artificially restricted under land use policies introduced since the mid 1990s, and the supply of which was also discriminately taxed since around the 2000s (the GST combined with infrastructure levies and other charges apply ONLY to new housing supply).

There’s a growing class of investors who applaud every increase in house prices. But their enthusiasm should not be shared by sensible policy makers because this generation of today’s young people are not only being denied low cost entry level housing, but they will also be expected to pay a disproportionately high burden of tax. That’s because they’ll be among the minority of the population with jobs, supporting the rest of us without them. On top of this, they’re going to live a lot longer. Maybe to 100. So for some of them, their working lives will be spent renting other people’s property, paying higher taxes to fund a disproportionate number of old people, and then somehow fund a 40 year retirement.

It’s not sounding pretty, is it?

To me, this makes it all the more imperative that today’s policy makers understand the primary importance of promoting home ownership for all Australians. As an enforced means of saving, it beats superannuation, it promotes long term wealth generation and continues a long and successful tradition of home ownership for all in a prosperous and egalitarian society, as Australia has been.

That promotion of home ownership should not come through failed grants or financial stimulus to the demand side, but removing barriers and costs from the supply side. The rigid urban growth boundaries and densification policies which became fashionable under a succession of Labor State Governments since the mid 1990s are proven failures and should be abandoned. The discriminatory system of taxing only new supply through both the GST and per dwelling infrastructure levies is highly distortionary and has meant that between one third and 40% of the price of new house and land package can be attributed to taxes introduced only just over a decade ago.

Not only is it distortionary, it doesn’t even work: to the best of my knowledge, these upfront per lot levies account for only around 3% of local government revenues and there’s no way of linking the money raised to the things it’s supposed to be spent on (local infrastructure). Plus, it’s all but killed off the new home building industry, which is now producing fewer dwellings per thousand people than any time in the last 40 years, with the economic signals (unemployment being one) to show for it. Some achievement.

In summary, there’s almost no disputing that we’ll all be living longer, or that there will be more aged people as a proportion of our population than ever before. This can be cause for celebration, but it will also mean that the importance of home ownership as a broad social and economic objective for Australians needs to be returned to a central place in policy thinking, not shunted to the periphery of fashionable planning ideology as it has been.