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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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.