How to encourage seniors to downsize

Cross-posted from The Conversation:

Encouraging senior Australians to downsize their homes is one of the more popular ideas to make housing more affordable. The trouble is, incentives for downsizing would hit the budget, but make little difference to housing affordability.

It sounds good: new incentives would encourage seniors to move to housing that better suits their needs, while freeing up equity for their retirement and larger homes for younger families.

But the reality is different. Research shows most seniors are emotionally attached to their home and neighbourhood and don’t want to downsize.

When people do downsize, financial incentives are generally not the big things on their minds. And so most of the budget’s financial incentives will go to those who were going to downsize anyway.

Financial barriers to downsizing

There are three financial hurdles to downsizing. Downsizers risk losing some or all of their Age Pension, because the family home is exempt from the pension assets test, but any home equity unlocked by downsizing is not.

Downsizers also have to stump up the stamp duty on any new home they buy. For a senior purchasing the median-priced home in Sydney that’s now A$32,000. Finally earnings from the cash released are taxed, whereas capital gains on the home are not.

The Turnbull government has flagged the possibility of financial incentives in next week’s federal budget for superannuants and pensioners to downsize their home.

One proposal would exempt downsizers from the A$1.6 million cap on super balances eligible for tax-free earnings in retirement, or from the A$100,000 annual cap on post-tax contributions. But this would benefit only the very wealthiest retirees – just 60,000 retirees have super fund balances exceeding A$1.6 million.

More seniors would benefit from a proposal to exempt them from stamp duty when purchasing a smaller home. And many 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.

Staying – or downsizing – is seldom about the money

Research shows that for two-thirds of older Australians, the desire to “age in place” is the most important reason for not selling the family home. Often they stay put because they can’t find suitable housing in the same local area.

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

And so, few older Australians downsize their home. According to the Productivity Commission, about 20% aged 60 or over have sold their home and purchased a less expensive one since turning 50. Another 15% have “strong intentions” to do so in the future.

When older Australians do downsize, their decision is dominated by non-financial considerations, such as a preference for a different style of house and living, a concern that it is getting too hard to maintain the house and garden, or the loss of a partner.

These emotional factors typically dwarf financial considerations. According to surveys, no more than 15% of downsizers are motivated by financial gain. Stamp duty costs were a barrier for only about 5% of those thinking of downsizing. Only 1% of seniors listed the impact on their pension as their main reason for not downsizing.

There are better and cheaper ways to encourage seniors to downsize

If governments do want to use financial incentives to encourage downsizing, budget sticks would be cheaper and fairer than budget carrots. Even if they have little effect on downsizing rates, at least they would contribute to much-needed budget repair and economic growth.

The federal government should include the value of the family home above some threshold – such as A$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 A$7 billion a year to the budget.

Asset-rich, income-poor retirees could continue to receive a full pension by borrowing against the value of the home until the house is sold. The federal government would then recover the cost from the proceeds of the sale. If well designed, 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.

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 A$9 billion a year to the economy.

In short, the downsizing debate is a prime example of how governments prefer politically easy options with cosmetic appeal, but little real effect, on housing affordability. If they’re serious about making it easier for young Australians to buy a home, they will have to make tougher policy choices.

Article by Brendan Coates and John Daley from the Grattan Institute

Comments

  1. I have seen Brendan present a few times – on matter of credit, migration, housing, interfenerational equity he has total alignment with the MB thesis (and he is a good presenter). Good on ya, Brendan (**waves**).

    He and Daley clearly understand good fiscal policy design : “And so most of the budget’s financial incentives will go to those who were going to downsize anyway.”

    The article would also benefit from some comments about how flawed self-reported measures of motivation are…. yes only 1% listed effect of change in residence on aged pension is important, but if you *actually* attach a pension cost to hoarding housing as a method of estate planning (effectively transferring value of pension to the heirs; thanks taxpayer!), you will see a lot more than 1% move. The revealed preferences will be quite different to those stated. There is plenty of literature on this.

  2. ErmingtonPlumbingMEMBER

    Forcing old C#nts our of their life long home a decade or so earlier than they wanted, just sounds mean spirited to me.
    They’ll be gone soon enough ya pack of dogs.

    • lol, straya

      No one is suggesting anyone should be forced to do anything. Things like stamp duty are an active DISincentive for people to move/downsize. Why spend $30-50k on stamp duty, when you could use that to renovate the verandah and the kitchen.

      • Why sell and pay out the nose for the privilege only to find yourself back out in the – inflated – market and more than likely removed from all support groups and familiar surroundings.

        Seems a bit wonky from even a price mechanic aspect to focus on the house and not incorporate a more expansive long term cost weighing.

        disheveled…. not that property rights matter….

    • Yikes! No need to get emotional. This isnt about kicking the old cunts out. Just a bit more gravy to try and get the fuckers to make room for new families. Wish there was some incentives for me…. for anything… all i seem to get is a fist up the arse whichever way i turn.

    • Oldies staying in the family home is not the reason young’uns can’t afford a house of their own. If anything I think policy should be aimed at assisting people stay in the family home for longer to reduce pressure on aged care facilities.

      That said, going by that research one thing that might help is local planning changes that allow more age friendly redevelopment in existing areas, allowing people to downsize without forcing them to leave familiar surroundings. Maybe make it easier to turn the family home into a dual occupancy so they can stay in a more manageable sized dwelling and at the same time provide additional housing in existing areas.

  3. DingwallMEMBER

    “The federal government should include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test”

    Bloody oath – bring this on now.

    As an aside but somewhat closely aligned, I am also pissed when my wife, whose primary focus is providing aged care services subsidised by our beloved government, heads off to see an obviously very wealthy client. Although these people have obvious needs for such service, they are clogging up the queue for those often in more dire need who also can hardly afford the embarrassingly low fees charged directly. This is a classic area tighten considerably to produce more appropriate budgets etc. Instead next budget the morons of government will probably remove more from disability pensions or make disability/pension tests more onerous for those who can least afford it (and of course increase the numbers of public servants to monitor this bullshit)

    • So tax the house when it is passed on, unless it is going to the surviving spouse or an actual dependant. (I think that very few people would want to see an elderly widow or disabled adult child forced out of his or her home because of inability to pay the tax.) You are proposing effectively forcing out working and middle class people whose modest little house is now worth a lot of money, due to government policies that have made the land under it very valuable, while the genuinely rich get a free pass, even though they have received far more than the actuarial value of the pension in superannuation tax concessions. People who are forced to move away from their family and friends (their support network) are likely to be bigger (and more expensive) consumers of aged care.

  4. I’ve noticed a fresh round of downsizing, by 3-4 retiree couples, in my local area (inner-west of Melbourne). They’ve only just arrived in the last 12 months into the area, after living the majority of their lives on acreage. Maintaining these properties is hard work in your old age.

    People are definitely downsizing, but they’re typically only those who can afford the move (after selling their acreage for a bomb!), and are typically going to move to well serviced inner-suburban areas.

  5. yep. if this Morrison clown pipes up this week with tax breaks and welfare that benefit wealthy retirees under the guise of improving housing affordability then I really will take to the streets with a pitch fork…

    this government is currently giving young Aussies the ass-raping of a generation, likely to never be repeated on as grand a scale, and all we have to look forward to this week is smoke, mirrors and obfuscation around the edges of the core issues that are F#$%king the futures of the next generation of Australians …

    • The young could’ve just lost the demented identity politics and general loony lefty kool aid drinking and grown a dick. It’s undeniable that it is well deserved to a large extent.

      The irony is there will be so many redneck types that represent everything they despise that have and will make an absolute killing out of all this, putting them well into the upper classes for decades. Talk about boomers this generation is as dumb and pathetic as the former is greedy and spiteful.

  6. My plan is simpler – Reintroduce Apex and other gangs into suburbs gentrified by the boomer investors.. ?

    • SoMPLSBoyMEMBER

      APEX are a diminishing threat. The bigger prospective danger on the horizon lies in on the ‘other side’ of an economic meltdown The inability of either side of Gov’t ( and their willing constituents) to look beyond the short term profitability for a small group has me plenty worried about how the ‘aftermath’ will be dealt with when the property cult implodes. Max Rockatansky would be uneasy here.

      We’re spinning madly out of control at this moment yet there is no sincere recognition that a terrible event is approaching.
      We’ll need extraordinary levels of help and assistance when ‘that’ happens as we’ve demonstrated both our inability to even recognize a clear and present danger and a pathetic immaturity reflected in the ubiquitous ‘wink’ and ‘she’ll be right, mate.”
      Whatever foreign power brings the winch and tow rope will be in a position to make great demands.

  7. stop the stoats

    All this expense and complexity when a bullet only costs 50 cents these days.

    • boomengineeringMEMBER

      Hey I’m an old c#nt, that bullet idea is good though , everyone one young or old sick or not must participate in a triathlon the last 50% gets the bullet

      • Or can work 10hr days without stop, except for exhaustive triathlons or other such sports.

        disheveled… just like the good old days in Ranger Bat, even the sick and wounded had to file out for PT. If all you could do was lift your pinkie that’s what you did the entire time… sniff the good old days….

  8. So first the article notes that most people want to grow old and die in the community and place they reside in now – and often have done for many decades – and then goes on to suggest ways to shove them out. The stupidity of this shit is truly mind numbing, not the least for the fact that it simply isn’t going to happen for that very reason.

    So what happens when specufestors bid up the price of housing in areas where people whose sole means of income is the age pension reside?

    This whole way of thinking is utterly arse-about-face – it amounts to punishing those who have zero interest in the dollar value of their own home or anyone else’s, for the actions of those who are obsessed by it.

    In an environment of outlandishly overpriced housing, how does using the dollar value of a person’s place of residence as a benchmark for receiving the aged pension do anything other than enshrine into legislation the specufestor mindset that a house is nothing more than a pile of money waiting to be realized?

  9. Out of interest , is there anyone here versed in constitutional law?

    The consequences of this proposal appear so ill thought out that I’m not convinced it could even pass legislation. For this to go ahead I think it will need to be enshrined in law that the dollar value of a house supplants the very reason for it’s existence – as a home and something that human beings cannot survive without.

    You are going to have to successfully argue that a house is first and foremost a financial asset and the people it houses and the community to which it is attached are irrelivent in that respect.

    Good luck.

  10. Interesting to watch this unfold… Anyone who bought a house more than 30 years ago on a full block within 20kms of the city, even in previously very working class suburbs are now millionaires and those who bought more than 50 years ago now find themselves in the enviable position of being multi-millionaires, but are they to blame, or is it successive governments, through whom their policies pushed up land values to the stratosphere?

    Even if more incentives to sell and downsize were implemented, a whole lot of $2m and $3m houses on the market is not going to do a whole lot to make housing more affordable. These houses will be for upsizers; those who already have a lot of money or have inherited property fortunes, and the trickle down effect will be negligible when there is already such huge pent-up demand.

    Both Libs and Labor will keep the immigration tap running, and seriously, there is very little demand on them to change this damaging policy due to political correctness, so all they offer is that young people should lower their expectations and live in an apartment or on the fringes (or get a better job or have rich parents).

    And adding supply is not the answer because as houses get pulled down to make way for dogboxes, it’s the wrong sort of supply.

    All I see for the future is a widening of the gap between rich and poor, and a shrinking of the middle-class as they gravitate towards one or the other depending on their property holdings.