Encouraging elderly homeowners to downsize their homes is one of the more popular ideas to make housing more affordable. The trouble is, incentives for downsizing would impact the budget, but would make little difference to housing affordability, according to Brendan Coates and John Daley of the Grattan Institute. 

Theoretically, the proposal ought to work: new incentives would encourage seniors to move to housing that better suits their needs, while freeing up equity for their retirement and larger dwellings for younger families.

The reality, however, is radically different. According to research conducted by the University of New South Wales (UNSW) for the Australian Housing and Urban Research Institute (AHURI), most seniors are emotionally attached to their homes and neighbourhoods, and don’t want to downsize.

When seniors do downsize, the financial incentives are generally not the strongest drivers. “And so most of the budget’s financial incentives will go to those who were going to downsize anyway,” said Coates and Daley.

Three financial hurdles to downsizing

There are also some very real financial hurdles to downsizing. First, downsizers risk losing some or all of their age pension, because the family home is exempt from the pension assets test. However, any home equity unlocked by the act of downsizing is not.

Second, downsizers have to stump up the stamp duty on any new home they purchase. For a senior purchasing the median-priced home in Sydney, that’s now $32,000. Third, earnings from the cash released are taxed, whereas capital gains on the home aren’t.

Financial incentives are being proposed

The federal government has flagged the possibility of financial incentives in the federal budget for superannuants and pensioners to downsize their homes.

One proposal would exempt downsizers from the $1.6m cap on super balances eligible for tax-free earnings in retirement, or from the $100,000 annual cap on post-tax contributions. However, this exemption would benefit only the very wealthiest of retirees (just 60,000 retirees have super fund balances).

More seniors would benefit from a proposal that would exempt them from stamp duty when purchasing a smaller home. Many more seniors would benefit from a Property Council proposal to quarantine some portion of the proceeds from the pension assets test for up to a decade.  

“The trouble with all these proposals is that they would hit the budget – because everyone who downsized would get the benefits – but they would not encourage many more seniors to downsize,” said Coates and Daley.

Staying put or downsizing is seldom about the money

According to the aforementioned AHURI report, two-thirds of older Australians cite the desire to “age in place” as the most important reason for not selling the family home. Often, they choose to stay put because they can’t find suitable housing in the same local area.

In established suburbs, there are relatively fewer smaller dwellings because planning laws restrict subdivision. And even if the new home is next door, there’s the emotional cost to leaving a long-standing home, and to packing and moving.

As a result, fewer older Aussies downsize their homes. When they do decide to downsize, their decision tends to be driven by non-financial considerations, such as a preference for a different style of house and living, the loss of a partner, or difficulty in maintaining the property.

There are better ways to encourage seniors to downsize  

If governments choose to use financial incentives to encourage downsizing, “budget sticks would be cheaper and fairer than budget carrots,” said Coates and Daley.

“The federal government should include the value of the family home above some threshold – such as $500,000 – in the Age Pension assets test. This would encourage a few more seniors to downsize. More importantly, it would make pension arrangements fairer, and contribute up to $7 billion a year to the budget,” said Coates and Daley.

Retirees could continue to receive the full pension by borrowing against the value of the home until it is sold. The federal government would then recover the cost from the proceeds of the sale. If well-designed and executed, this scheme would have almost no effect on retirees; instead, it would primarily reduce inheritances.

“State governments should abolish stamp duties on property, and replace them with a general property tax, as the ACT Government is doing. This would encourage downsizing, although only at the margins,” said Coates and Daley. “But the real policy justification is that it would help working-age households to take a better job that’s only accessible by moving house, and so improve economic growth. It’s a big prize: a national shift from stamp duties to broad-based property taxes could add up to $9 billion a year to the economy.”
 

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