Feeding and fattening on big, empty homes

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By Leith van Onselen

The Weekend Age published an interesting article on how Australia’s ageing population is exacerbating housing shortgages, since it is increasing the number of elderly “empty nesters” living in large homes with excess bedrooms, thereby helping to deprive young, growing families of housing choice:

The number of older Australians who live alone in large homes is startling. An analysis of 2011 census data reveals that of homeowners aged 70 and over who live alone, 62 per cent have a house with three or more bedrooms. That adds up to 238,078 houses with at least three bedrooms occupied by just one person. Among houses owned by older couples (with at least one partner aged over 70), 82 per cent – or 332,752 houses – have at least three bedrooms.

The phenomenon appears certain to become much more pronounced [as Australia’s population ages]…

That trend will also exacerbate the shortages and cost pressures that already strain our housing system…

Having identified the core problem, the article then goes on to explain some of the causes behind empty nesters remaining in their large family homes:

So why don’t more people downsize?

There are two answers to this question – the first is to do with the type of housing we build, the second with the way we tax it.

With almost three-quarters of occupied private dwellings in Australia having three bedrooms or more, people who want to move to a smaller house have limited options, especially if they want to stay in the same locality. Zoning and planning rules often exacerbate this situation by inhibiting the construction of more diverse housing stock. And those rules could tighten up in many areas under Victoria’s new zoning system, which gives local governments extensive powers to determine what kinds of development can take place in different locations…

A lack of housing choice is not the biggest barrier to downsizing for older Australians, though. More important is the way we tax property and the way this interacts with pension payments…

First, there is the transaction cost of any move – particularly stamp duty, which would amount to tens of thousands of dollars. Second, because [the] home is [their] primary residence, it is exempt from the assets test for the age pension; if [a pensioner] sells the house, though, the proceeds from its sale would not be exempt…

In Australia, the family home is exempt from any form of taxation, except the stamp duty paid on purchase… As a result, we use the family home as the primary store of personal wealth to be passed on to the next generation…

Economist Judy Yates has calculated that owner-occupiers benefited from government tax expenditures (that is, revenue forgone) totalling $45 billion in 2005-06. In a background paper for the Henry tax review in 2010, researcher Gavin Wood and his colleagues showed how these substantial benefits to home owners increase with age and wealth, adding up to an average annual subsidy of more than $5000 to home owners aged over 65…

The one reform a government might conceivably adopt with bipartisan support would be to abolish stamp duty and replace it with a broad-based tax on the value of land. The ACT is the only jurisdiction in Australia currently moving in this direction.

By reducing the costs of moving house, the abolition of stamp duty would remove one significant impediment to downsizing with age.

A land tax would also capture some of the windfall gains that accrue to home owners from a well-located property, and from government investments in civic improvements and better infrastructure.

It’s hard to disagree with this analysis. A quick examination of the macro data supports the notion that some segments of the population are “over-consuming” housing, with the number of people per dwelling rising since the mid-2000s (suggesting tighter overall supply), but the number of bedrooms per dwelling rising by even more (see next chart).

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Further, according to the 2011 census, the percentage of group households increased to 4.1% from 3.9% in 2006, whereas the percentage of single (lone person) households declined to 24.3% from 24.4%, despite the ongoing ageing of the population.

There are also reasons to support the idea of replacing stamp duties with land taxes.

As argued previously, stamp duties unfairly penalise people that move to homes that better suit their needs, as well as hinder labour mobility since they discourage workers from relocating closer to employment.

A broad-based land tax would also assist in the provision of new housing via two main channels. First, it would help make infrastructure investments self-funding for governments, since any land value uplift brought about through increased infrastructure investment (e.g. new roads, trains, etc) would be partly captured by the government via increased land tax. Accordingly, governments would be more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs. Second, a broad-based land tax would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.

Freeing-up planning and land-use rules is also crucial to improving housing supply, both in the inner and middle core, as well as on the fringe.  Many of the leafier inner and middle suburbs around Melbourne, for example, do not permit new buildings over two storeys high, and instead try to concentrate higher density development along major transport corridors and/or shopping strips. This means that those empty nesters wishing to move to a smaller home in the same area often cannot do so, reducing their incentive to move, as well as stifling the overall provision of homes.

Draconian planning rules, lack of land release, upfront development levies and taxes, as well as inadequate infrastructure financing and provision on the fringe also impacts housing supply in inner areas by inflating the price of land across the entire urban zone. This means that the costs for a developer of buying a pre-existing home, demolishing it, sub-dividing it, and then building several new dwellings is often too high for such homes to be priced affordably.

Finally, as argued in the above article, the quirk in the tax and welfare system, which allows an elderly person to live in a million dollar-plus home whilst receiving the full aged pension, contributes the the housing mis-match by removing the incentive to downside. It also happens to be highly inequitable and unsustainable, and should be addressed; although a broad-based land tax would probably be sufficient to re-align incentives in the right direction.

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Comments

  1. Family Assist Part S
    Family Assist Part S (carrots and sticks), would allow a sole pensioner be able to sell up their PPOR and the proceeds remain asset test free for the pension test, if they live with another ‘family’ and put a majority of their investments into Govt Bonds or an approved govt savings account. The rent the ‘family’ receives would be tax free and the ‘family’ would as get a $5k govt grant, to help house the pensioner.

    At the same time a Land Tax needs to be introduced to create the ‘stick’.

    The ‘family’ could be young FHB and need not have a direct family relationship with the pensioner.
    It will be a bad refelection on our society if we allow 28% of our homes to end up as lone occupants. Now at approx 24%. Ageing in place will be a social disaster. Isolation and loneliness is state we should find unacceptable for an advanced society.

    And here is the rub. Boomers will just expect wage earners to pay more tax as evidenced in the final paragraphs of this story…

    “We are going to need about another 30,000 places for dementia patients by 2020, which means building 300 more care units, but we are on track to build little over half that.

    So, here’s the bad news: The Medicare levy must rise, and substantially, to help fund the burdensome costs associated with ageing; taxes must rise, equally substantially, to build the facilities to house dementia sufferers; and we’ll also be taxed more to fund the training of the carers we’ll need.

    And if we really were the clever country, we’d be investing in mental health research – it’s already a $5 billion-a-year headache.”
    http://www.heraldsun.com.au/news/opinion/boomers8217-crisis-over-dementia-will-threaten-society8217s-fabric/story-fni0ffut-1226724706970

    • I think one of the problems with housing prices today is that young folk also expect the house to have absolutely everything, when I first bought a house in 86, there was no fencing, no garden, no driveway or clothes line, there wasnt even any carpets on the floor (although we did have the wet areas tiled) we saved up to buy the things we needed, I even remember painting the concrete of the front room to keep the dust down.

  2. the article then goes on to explain some of the causes behind empty nesters remaining in their large family homes:

    So why don’t more people downsize?

    There are two answers to this question – the first is to do with the type of housing we build, the second with the way we tax it.

    Well Here’s a third! What do you do if your kids want to visit you with their families? What? You put them in a dungy Motel 10 K away?

    P.S. This is not an argument against the general thrust of the proposals.

    • But it is an argument that resonates (but would be difficult to quantify). I know that about my folks. They also don’t want to leave the home because they’ve grown quite accustomed to it, it can be a very powerful force – no matter the financial implications one way or the other.

    • Flawse
      I have a 4 bedroom home and had 13 people stay with us over Christmas. Blow up beds, lounges and swags are all fine.

      • willy…let me know if you need any more of any of those things !!!!! :)…or a tent for the back yard!

    • This is strange in Australia. I am from Russia and we pay tax on property every year. It is not high there, but still depends on the valuation of the property. You should let people to decide, either to stay in $1M house, or move further from the high value area and still have your 3 bdr for your family. Or to decide whether you have 1 bdr and your family will stay in the hotel. It is not fair for the taxpayers to support lavish lifestyle, while young generation can not afford housing.

  3. i think a key thing to take away from this is yes its happening but why should it be a problem?

    If people dont want to leave their family house that they either grew up or raised their kids in they shouldnt.

    Yes the government should make it cheaper and easier if they want to downsize but isnt it almost communistic for us to assume they SHOULD move so that others can take the existing house?

    Why not fix the supply issues and make it cheaper for those people to build their own houses…

    • Agree with your sentiments. However, people living in very expensive (million dollar-plus) homes should not expect to receive a full pension, as currently occurs. This is unsustainable and inequitable.

      Further, it’s hard to deny that land taxes are far more efficient and equitable than stamp duties.

      • “However, people living in very expensive (million dollar-plus) homes should not expect to receive a full pension, as currently occurs”

        Absolutely! That really p…es me off! However while we are in that process of reform we better give people some real ways of long-term saving?

      • +1. The fact that the family house has becomes the single biggest asset means it should be treated as such.

        Our pension test are almost a joke. For a part pension for a couple:

        1) Family house exempt (to any value).
        2) + upto 1,110,500 in assets.
        3) + income upto 72K.

        You can get a part pension up to those limits. And of course there are many ways to ensure you don’t reach those limits.

        But seriously, if you met someone with their own house + 700K in assets + earning 45K a year, so you think they would need assistance? Now make that house a 3M property?

      • @ flyingf. And that is exactly why i have opted out of the tax system. I would rather earn less money and have more time than pay extravagant taxes to prop up the wealthy retirees.

        And the great thing i’ve found is if you set yourself up like a retiree (high assets low income) then the amount of government benefits you get back is amazing, and all without as much as a peek at your asset values.

        Australia is a high asset, low income kinda place i’m afraid.

      • @aj. That has to change sooner rather than later. I think we are starting to see people reject this notion of this is how it has to be.

      • @ ff. I’d love it to change, but while it doesn’t i’m not playing. I found myself working 60hrs a week getting my ar&s taxed off and making very little meaningful saving headway while the asset holders were swanning through life with their tax shelters and untaxed capital gains, and the speculators were just boosting asset prices ahead of savings.

        My taxes were funding these retirees and the specufesters! I’m not interested – time with my family is so much better anyway.

    • Communistic is what we have. I have my own 4 bdr house in 10 km from CBD, but when I retire I would definitely do something:
      – will move further from the CBD in quiet suburb
      – will downsize to 2 bdr.
      This is logical and right. And property tax would help to incentify people to do so. It is not fair that at the such a high living costs, young couple with kids have to struggle and pay taxes, while eldery people have so many exemption. Any other country have a property tax.

    • Yes, death duties at 25% need to come back above a $750k exempt amount. Rural and business assets ( ongoing business operations) also need to be exempt. Basically if the assets produce GDP, they are exempt.

      The same $750k limit should be the cap for the PPOR being asset test exempt. Reverse mortgages, provided exclusively from centrelink are the answer and of course a land tax.

  4. have to concur with this. In my current rental, one neighbour lives alone in a 4 bedroom place on 450square block. Other neighbours are boomer, kids moved on, living in a 3 bedroom place. Across the road no different. And the ownder of the place we live in is a boomer as well.
    Similar to the previous rental where the neighbours grandkids lived around the corner in a town house and used to come round to grandparents house for a back yard to play in.
    bit of a joke really.

    • And the very reason that burbs in all capitals have seen a population since 2001.

      I am still in awe of the amount of suburbs like Rochedale, Springwood, Jindalee, Albany Creek and Capalaba that had population declines from 2006 to 2011.

      A very nice new tool from Fairfax to play in.

      Fairfax Population Growth Tool
      http://images.smh.com.au/file/2012/12/19/3901120/census_web/

      So population decrease or increasse has very little to do with house prices, but population growth does?
      I will need to ponder hard on the spruikers who talk about population growth driving prices higher, for surely the reverse must be true and yet It is not.

      The amount of people at any certain age does.

      Why did the new families not move into these burbs? Too unaffordable? Ganny or Grandpa holding onto their home? I suspect it is sociology and a dramatic rise in lone occupants that have caused the decline. Question is, what will happen to prices in these burbs when the lone occupants start to die on mass as our death rates double over the next 25 years.

      Baby boom to death bust.

      • yes – i think the jury is still out on the effects of baby boomers retiring and downsizing. Currently they arent downsizing, and who can blame them as a large home is a tax free source of wealth gain, and it aint means tested, not to mention the cost/hassle/tax to move. I reckon you might have to wait till death or boomers are forced into homes, could be some way off. Anecdotally a friends of mine’s parents were looking to sell their large place, werent happy with the price offered so have rented it out and use the rent to supplement their winnebago travels. I wonder how much of this is going on.

  5. It’s not density that puts me off, it’s inappropriate development. The moment the whiteshoes get a go ahead they knock over every friggin tree and put a wall to wall monstrosity on the block – whether its one or twenty its the same sh&t and it destroys the character of the suburbs.

    Serious however, structurally there is just no incentive for elderly to look at their options and so changes are needed. It is however incredibly wrong and cruel to force elderly people out of their family home – claw back the pension if the asset is highly valued.

    This wouldn’t be a problem if the other issues in housing – supply and credit were fixed – and we could get on with improving the planning in a meaningful way.

      • No that annoys me immensely. What i am saying is people should be very careful in putting pragmatism before sentiment, in putting functionality before humanity.

        The greatest cruelties of the world have been performed by people that declared they had the interests of society at heart.

        Elderly people are victims of the system as well – if they want to live in their home where their memories are it is not their fault that Greenspan et al built an asset bubble.

    • i agree to some degree with AJ re inappropriate development. A 600-700 square block can be turned into 2 family homes with a semi decent back yard assuming front yard and garage space is minimised ( no one uses these) and it goes up 2 levels. There is no middle ground at the moment within 10 ks of the city. Unaffordable mansion, or apartment / townhouse.

      • yes – the density of our leafy suburbs could be increased easily while keeping the character. Yet the development so far is character destroying, so naturally people opt for the ‘no development’ option.

        As i’ve come to understand the issues more, it’s clear their is a paradox as well. Without the urban boundaries, land-banking, tax perks and debt boom, then the development in the leafy suburbs would be moderate as there would be enough choices that people wouldn’t want to pay for a stupidly expensive big box with no trees or yard and we wouldn’t be having this capital misallocation issue.

  6. Another reason is that people don’t want to live/share with each other anymore. Everyone wants their own space. The over 70s don’t trust the younger generation(s) in their home and the younger generations believe living with a 70 year old would cramp their style.

    Some examples include, how many kids share bedrooms these days ? How many of these 3/4 bedroom places have multiple generations living together ? What happened to the old share houses where rooms used to be let out ?

    In the end necessity, such as health issues or financial hardship, will only force people to consider alternatives.

  7. My folks are in this situation now, both self-funded retirees and living in a large expensive home. They’ve talked recently about moving but there is big disincentive for them to move with paying stamp duty, moving away from family and finding a place that meets their standards/expectations. To stay in Sydney and still be close to family would cost them a lot of money for little gain.

    They talked about moving to a semi-rural area to have more space and relax but the costs are exbortinant, they also talked about moving out west to a country town and rebuilding but are worried that it would not work out as they’d be far from the family and be expensive to re-settle.

    In some ways they are as much victims to the Sydney housing market as anyone else. Even to look at moving to a nice over-55 place, they are looking at over $1m with many clauses which would cost them money if they decided to relocate. Frankly these days $1m doesnt get you much.

    • Frankly these days $1m doesnt get you much.

      Yet it is extremely difficult to earn this.

      How much of this is due to the fact that we such high house prices, it filters down into everything.

      Maybe the finance minister should be saying we are uncompetitive due to the high Oz dollar and housing bubble.

      • Yet it is extremely difficult to earn this.

        Yup, how does someone obtain this amount from their PAYG wages?

        They don’t, so the message is hustle through quick and risky capital gains, or lose your scrupples… because work won’t get you anywhere.

        With Negative RAT, saving won’t get you anywhere.

        So if the message to society is work and savings are both futile, what do you expect them to do?

        All of us to become para-criminals like real estate agents, mortgage brokers, financial advisers, little landlords or politicians?

      • …otherwise you’ll get

        a blowout in overseas borrowing,
        a slowing down in marginal increases in productivity,
        a declining fertility rate and;
        increased nominal wages for non-productive sectors

        thank goodness we aren’t getting that here..

      • *clap* Glad to see someone sees the whole picture.

        The big crux of it is a declining fertility rate. People just don’t see this.

        Edit: Even parasites are smart enough not to kill their hosts. On the bright side, no big pop increases.

      • Even parasites are smart enough not to kill their hosts

        No one ever accused Australian little landlords of being smart.

  8. If granny is living in a 3 bedroom house, then perhaps government thugs should enter the premises and demolish 2 internal walls, thereby leaving granny living in a 1 bedroom house.

    Surely this would be the nicest way to solve the problem of the empty bedrooms.

    • in 21st century the living area can be metered in square meters + land as well. Or they should just do it via housing valuation and age pension level for different living areas.

  9. I keep coming back to it that a certain culture associated with a certain region in the world, is actually far brighter than everyone else, in spite of being widely sneered at as unsophisticated rednecks etc.

    For example, they have worked out that if you don’t want intensification in your neighbourhood; if you want the young folk to shack up and have kids and live a reasonably financially secure life; and if old folks want to be left in peace without being targeted for fiscal disincentives to force them out of the family home; YOU LET FREAKIN’ DEVELOPMENT HAPPEN SOMEWHERE ELSE….and stop worrying about the Gaia Earth Mother’s feelings….!!!!

    It ain’t rocket science….!!!!

  10. Land tax woould go a long way to getting the free loaders to help fund the retirement they feel they deserve.

    I’ve got no problem with the Govt providing CPI interest loans to those who don’t have the cashflow to pay the land tax, but am sick of seeing the most powerful voting block tip the scales so far to their own advantage.

    A house / home is for shelter, not a tax shelter!

  11. And yet another reason that we require a 4 bedroom house for the two of us is that 2 of the 3 ‘spare’ rooms are frequently occupied by grandchildren.

    Factor in: sick kids, after school care, parental social weekends, business & other trips, school holidays & family occasions (birthdays, anniversaries etc.)

    The Grannies house is a family resource, wealth storage, inheritance & so forth.

    All together now-
    We shall not, we shall not be moved…

  12. I really don’t like the pre-occupation of a land tax on the PPOR.

    The only situation where I would favor this introduced is where the PPOR occupies multiple lots, eg the Packer and Fairfax compounds over 6 or so lots.

    In NSW these are currently exempt, it is cases such as these that really do decrease supply. See Clause 13.

    http://www.osr.nsw.gov.au/lib/doc/rulings/rrlt082v2.pdf

    • Why not?

      If the avergae person earns $70, they get around $15k in an income tax liability.

      How about we tweak the average LVT bill to be around $10,000, and Income tax on $70k at $5,000.

      It incentivises reduction in the superfluous use of land.

      LVT’s away from CBD’s are much less,thus incur a lower tax bill, approaching zero for pastoral land.

      Childless people share housing, halving their tax obligation.

      People desiring big space either pay more for it where LV’s are high, or move to low LV areas.

      Councils can collect it up front, and THEY can build roads, schools (or not schools if the area is particularly barren).

      Federal governments can not have to owrry about this, and focus on things like defence, trade, universities, and punishing poor people if it is a coalition government at the time…..

      Income tax in, only to be monitored by the ATO, to be evaluated by tax ganets once per year, then given out as transfer payments in the scale we see is not efficient.

      We can also, see labour flee, as an asset.

      Our asset of land can’t flee.

  13. These parasites make me want to move out of the country. Here I am, paying massive amount of tax to support an ever increasing aged pension for these millionaires, while also having to pay ridiculous rents – even as they live like kings and queens in their mansions.

    Ridiculous.

  14. There’s definitely a problem, and a solution needs to be found, but I’m not sure that reducing stamp duty and increasing land tax / rates like the ACT is doing is the answer. For one thing, at least to some extent, abolishing stamp duty will just cause houses to rise in price by the corresponding amount. Prices will rise to the limit of what people can afford. And if someone living in a $1 million house wants to downsize to a $500,000 apartment, is a $15000 stamp duty bill REALLY what stands in the way? On the other hand, if rates rise to absorb the lack of stamp duty, it means that families – the ones this is all supposed to benefit, the ones needing the large houses, are now stuck with a recurring doubling of their rates bill. And if house prices rise due to the lack of stamp duty (as I predict) it will disproportionately increase land prices and thus rates on detached dwellings. Or in other words, if you want a big house to put the kids in, you are screwed either way.

    One thing I think they should do, is not have a pensioner discount on rates for detached dwellings. I mean, you can be a pensioner alone in a 5 bed house, and get half price rates! You should at least have to pay full price. And perhaps, you shouldn’t even be able to get the pension if your house has 3 bedrooms or more. That might sound tough, but it would be much more direct action. If you want government money, you shouldn’t be anti-social in land hoarding.