Everyone needs a sound retirement plan and for most people the home they live in is where they build their capital. The property market in Australia has been booming for decades and the baby boomers that have paid off their home loans will be able to reap the benefits. The property market has been doing so well in some parts of Australia that some investors have seen their investment double or even triple over the time they have lived there. In some cases the property market in some areas has done better than stock market.
Those home owners that have their homes paid off and are looking for a form of income can rent the property. The cost associated with renting a property out can eat away at potential profits and your valuable income. Having your capital tied up in a property can also cause a cash flow problem and you can be caught being asset-rich but cash flow poor. Having cash available for unexpected expenses might be tough to come by if you are fully invested into a rental property. Depending on that income from renting out a property where you have all of your retirement funds is a typical example of having all of your eggs in one basket.
One of the biggest risks associated with being fully invested into a property and depending on its value to be your retirement is that the property is vulnerable to price fluctuations. Home prices in Australia have been on the rise for the last few decades but no market is totally safe from recession. Falling house prices in the U.S., Europe, or Japan are a prime example of property markets that have gone into free fall. There are no signs now that there will be any fall in prices. Actually home values have continued to rise but that is not a guarantee for home prices in the future. Those who are looking to sell their houses now to fund their retirement are lucky enough as home prices are reaching all time highs again.
Planning for retirement takes looking at the big picture and far out into the future. Investing into an asset class such as property has been a great investment over the past few decades but that does not mean it will continue to be so. Australians should be wary of having all of their nest eggs in one basket but there might not be a safer basket in the market.