Booming house prices driving massive increase in size of inheritances to $120bn a year

Booming housing wealth, unspent superannuation and lower fertility are increasing the size of Australians’ inheritances, according to the Productivity Commission.

Despite helping the rich get richer, inheritances are nevertheless shrinking relative inequality by giving a bigger boost to poorer households’ wealth, the government thinktank found in a report released on Tuesday.

In 2018, Australians passed on $120bn to their nearest and dearest – 90% as inheritances and the rest as gifts – with an average inheritance netting the recipient $125,000.

The report found older Australians’ wealth is booming due to “strong real growth in house prices and almost three decades of growth in superannuation balances”.

It projects a fourfold increase in the total value of inheritances between 2020 and 2050 “partly driven by rising wealth among older age groups” with housing wealth a “significant factor”, followed by unspent super.

“Older age groups own more housing wealth, they draw down on housing wealth slowly, and inherit large housing wealth from their partners in old age,” it said.

Housing wealth represents about half the wealth of people aged 30 to 59, but 54% for those aged 60 to 99 in 2018, set to increase to 66% by 2048.

The ageing population will see the number of deaths double by 2050, with older people making up a larger share, and falling fertility rates mean “fewer children to leave their wealth to in the future”, it said.

Inheritance of real estate is tipped to reach about $100bn in 2019 dollars in the year 2035, assuming house prices rise in line with inflation.

The report found that wealth transfers “reduced relative wealth inequality, because wealthier people received less in wealth transfers as a share of their existing wealth than poorer people”.

“For example, as a share of their existing wealth, transfers boosted the wealth of the bottom 20% [of households by wealth] by about 30 times more than for those in the top 20%.”

The report found that asset price growth itself, particularly for housing, has a much greater impact on wealth inequality than inheritances.

Although it noted that parents lending or giving money to their children to buy houses – dubbed the bank of Mum and Dad – could have “broader effects on future house prices and affordability that could affect wealth inequality”, it said there was a lack of data to study the impact.

The Productivity Commission found that a high rate of “precautionary saving” among the elderly in anticipation of aged care and medical expenses is leaving many retirees with lower consumption and standard of living than they can afford, with many reluctant to draw down on their housing wealth.

The productivity commissioner, Lisa Gropp, said Australians are “[giving] tremendous sums of wealth during and at the end of their lives”.

“Over the past two decades, the total value of wealth transferred was about $1.5 trillion,” she said.

“The rest comes from all the other things parents give to their children – education, networks, values and other opportunities.

“By the time people receive inheritances, they’ll usually be well into middle age — about 50 years old on average. This limits the impact inheritances have on opening up lifetime choices and opportunities about career and family.”

Australia has experienced a boom in house prices, with double-digit annual growth in many cities in the past two years, only expected to contract in 2023 with rising interest rates.

Australia’s taxation system is geared towards encouraging intergenerational transfers of housing wealth, as the family home is exempt from the pension assets test.

Labor lost the 2019 election in part on its proposals to change negative gearing and capital gains property taxes, and the misconception that ending excess franking credit rebates amounted to a “death tax”.

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Source: The Guardian