How to encourage seniors to downsize

By Leith van Onselen

The May Budget included the below measure aimed at encouraging seniors to downsize from their large homes to free-up housing for Australian families:

Now, The AFR has run an article on the financial pitfalls involved with seniors downsizing:

Australia’s property market could get an unexpected volume boost from the middle of next year when the federal government’s new home downsizing program, announced in the last budget, is due to come into effect.

That’s assuming the legislation passes and that a sizeable number of Australians take up the option of selling their principal place of residence to buy a smaller home, with a view to injecting more money into their superannuation…

On the surface, the policy could be regarded as a win-win for retirees and those seeking out a home. However, before heading down the pathway to downsizing your home, it’s very important to tally up both the raw costs and the potential risks…

As well as the substantial costs associated with selling and buying a property, home downsizing will likely result in many individuals or couples losing part or all of their existing or future Age Pension entitlements…

While it may seem a sensible strategy to inject more funds into superannuation to capture the benefits of tax-free income in pension phase, the end result could be financially disastrous.

Consider that the family home is exempt from the assets test used for calculating pension entitlements, while all other assets outside of the home including superannuation are taken into account. Average superannuation balances at retirement already put many Australians close to or over the pension assets test thresholds…

…it’s probable that many will exceed the asset limits by selling a home and depositing additional funds into their super account, even after the costs of purchasing another residence. As such, any tax savings on superannuation income earned in pension phase may be completely offset by the loss of pension entitlements and the costs of downsizing.

While providing financial incentives for seniors to downsize sounds good in theory, it is unlikely to be all that effective. As noted by the Grattan Institute recently:

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…

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…

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 also equity concerns with providing financial incentives for seniors to downsize. For example, why should a wealthy senior couple living in an expensive suburban home (which they purchased cheaply decades before) pay no stamp duty when they downside, while at the same time a young family upsizing from an apartment is required to pay stamp duty?

A better and fairer option is to abolish stamp duties for everybody and replace these with a broad-based land tax.

Scott Morrison’s housing affordability speech last year pinned the blame for Australia’s housing affordability woes on supply not keeping-up with demand. But part of this problem relates to the mis-match between supply and demand created as older empty nesters occupy most of Australia’s family friendly homes, whereas younger growing families are forced to live in ill-suited units and apartments.

Abolishing stamp duties in favour of a broad-based land tax would obviously remove the penalties currently attached to relocating while incentivising households to move to more appropriate houses or employment. In turn, there are likely to be benefits to congestion and commuting times as the housing stock is utilised more efficiently.

There are also likely to be significant efficiency benefits.

The Australian Treasury has already shown that stamp duties on real estate are one of the least efficient taxes going around whereas land taxes are the most efficient source of tax available, actually creating positive welfare gains to the domestic population since non-resident home owners are also taxed (see below chart).

ScreenHunter_6774 Mar. 30 10.24

The Henry Tax review came to similar findings. As has the Productivity Commission (here and here). Even the property lobby has backed the exchange of stamp duty for land tax.

Moreover, given that there is a productivity pay-off in switching-out the taxes – some of which would flow to federal government coffers via the broader tax system – it makes sense for the federal government to provide incentive payments to the states to facilitate reform.

In order to facilitate the transition, the government could give home buyers a credit for the stamp duty paid, and then deduct the theoretical land tax that would have applied since the home was purchased.

For example, if someone purchased a home in October 2011 and paid $30,000 in stamp duty, and their annual land tax bill would have been $3,000 per year had the new regime been in effect, then their credit would be $12,000, which can be applied against future year’s bills.

Another option, also championed by the Grattan Institute (as well as MB), is to include the value of the family home above some threshold, say $500,000, in the Age Pension assets test. This would encourage more seniors to downsize, as well as make pension arrangements fairer, and contribute up to $7 billion a year to the Federal Budget.

Asset-rich but cash poor retirees could continue to receive a full pension by borrowing against the value of the home until it is sold, with the federal government only recovering the cost from the proceeds of the sale. If well designed, this scheme would have almost no effect on retirees – instead it would mainly reduce inheritances.

Put simply, the Government’s downsizing initiative is merely window dressing and will have minimal impact. If the goal is to encourage better utilisation of the housing stock, then policy will need to make tougher policy choices along the lines outlined above.

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  1. “Another option, also championed by the Grattan Institute (as well as MB), is to include the value of the family home above some threshold, say $500,000, in the Age Pension assets test. ”

    Also championed by the Centre for Independent Studies by the way.

      • truthisfashionable

        Out in the regions or on the coastal towns. Get them out if the city where the work happens if they aren’t willing to contribute.

        I’m sure they will be welcomed by all the existing welfare recipients there.

        Hmm, what started as sarcastic now sounds like a policy that would be pursued.

    • A land tax replacing stamp duties would be a good start, forcing them to pay for their asset, and reducing the cost of downsizing.

      They should force them to get a reverse mortgage before getting any pension benefits. This will help the finance industry.

      PBS aged benefits should also be linked to net worth, and the retirement age indexed to life expectancy -15 years.

      Poor young Australians work hard to provide welfare to selfish rich boomer pensioners who never contributed much to Australia anyway.

    • The median house price in Sydney is now over $1 million, so the Grattan Institute’s criterion would result in a pension being denied not just to folk with mansions, but to almost everyone who owns a house. Since most of these people would be cash poor, they would have to either get out or get a reverse mortgage. Reverse mortgages currently have interest rates ranging from 6.2% to 6.4%, implying a debt doubling time of 10.8 to 11.2 years.

      A pensioner couple would have received around $200,000 after 6 years on the pension, not counting the pensioner concessions or any punitive land tax. After another 11 years, that $200,000 will now be $400,000, plus the pension that has been paid in the intervening years. It is easy to see that the bank or the government will end up owning all or most of the house. The interest will continue to snowball even after the elderly people have so little equity left that they qualify for the full pension. Some choice. Get out, starve, or give your house to the bank or the government. Meanwhile, the rich, who have often received several times the actuarial value of the full pension in superannuation tax concessions, don’t have to repay a red cent. Not a word about an inheritance tax, which could also solve the social justice issue.

      There are a number of studies showing that forced relocation of the elderly results in excess morbidity and mortality. See for example

      If young people want affordable housing for families, they should (and have the numbers to) vote out the major party politicians, who concentrated nearly all the jobs and development in a few big cities, flooded the labour market and the market for housing with migrants, encouraged investors, both local and foreign, to compete with Australian families for housing, etc., etc. Instead, you want to pick on some poor old devil who just wants to live out his days in the house that he slaved for decades to pay off.

      “Woe unto you, scribes and Pharisees, hypocrites! for ye devour widows’ houses, and for a pretence make long prayer: therefore ye shall receive the greater damnation.”

  2. it seems like every policy wonk out there considers the inclusion of the family home in the asset test to be a good idea. it is obviously not done due to the disproportionate political influence of the eldery, who represent an extraordinary roadblock to any sort of reform aimed at scaling back our cornucopia of old age gimmedats.

    • Not only that, but the stories i’m hearing of newly retireds’ pouring their super money into their house so they can then get the pension. Is there anything the BB generation won’t do to make sure they eat this country alive?

      • Its not just this country… it’s all of them. Check out a Chinese boomer if you want to feel good about being Australian

  3. What is there to downsize to? The new housing stock being built are:

    1) 4-5 bedroom mansions.
    2) Multi-level townhouses with stairs
    3) Dog box apartments.

    There are retirement villages, but they only exists to rip you off.

  4. why would we encourage them to down size?

    The problem people in Australia have is not that there is shortage of any kind of homes especially larger homes and that that shortage is driving prices of larger homes up. The problem that homes are expensive because they became gambling assets not homes.
    Small homes are way more expensive than large homes (per sqm) despite abundance of those being built. problem young Australians have is that homes are inflated by speculative demand driven by easy credit to investors.

    Look what happened in Perth, home prices fell 20% in last few years, rents fell 40% despite construction almost halving while population growth still continuing at relatively high levels and unemployment falling. It was just fall in mining exuberance that caused speculative confidence crashing and prices fall.

  5. Our current downsizing (happening right now) has just cost $85,0000 in SD, $40,000 in marketing and agent’s commission and about $15,000 in bridging finance. That’s to say nothing of money to be spent on restoring the new place to something of a similar level of comfort as to what we have currently. There will be some small change at the end and hopefully a residence that will be low maintenance for our remaining years, but the numbers barely stack up and a part pension is inevitable.

  6. truthisfashionable

    Summer might be interesting, the gas cartel might encourage a large number of elderly, who feel they can’t afford to cool themselves sure to electricity costs, to downsize into a lovely box in a garden setting.
    Sure the box will be filled with their ashes, but at least the crematorium is gas powered so the cartel wins in the end.

  7. A retired couple can have up to $380,500 in financial assets ( home not included) and still get the full AP which is $35,058/year/combined. The ceiling is $827,000 where above that, no AP entitlement will be received.
    If they sold up and placed $300,000 each of the proceeds into super and then probably into an account based pension to enjoy the tax free earnings/income, that AP would drop to $17,937–a very visible ‘loss’ of $17,120 ($329 ea/pfn).

    If the $600k ( the heart of this program) was banked and earning 2.2% ( approx current rates), there’s another $13,200/year of income. Leave the $600k exempt from the Centrelink asset test but allow a special Centrelink ‘income test’ to apply. This way, there’s be no reduction in the before/ after cash flow but of the earnings on the concessional $600k, an offset would apply.

    Currently, for a couple, any income above $300 pfn will result in a 50 cent reduction per dollar for both AP recipient. Using the above example, the AP ( from the income test) would only be reduced to $32,319 which is 92% of the full AP. This would ensure the downtraders are not net worse off from a cashflow perspective and would be much easier to accept than the current blanket ‘asset’ and ‘income’ test which suggests only a fool would be interested.

  8. I have done a lot of work in the field – at the grass roots – re interviews/focus groups for a range of developments targeting downsizers and unless a few key things happen they won’t buy/move etc

    1. mostly has to be in the same area they live in now – as per article above
    2. need a 25%+ jiggle in their skyrockets – so difference in the price of the current home and price of new digs, including all costs – stamps here are a major issue but so too are agents fees/marketing costs
    3. new property cannot be less than 50% smaller than current usable space and must do certain things re design/light etc.

    The means testing stuff etc. is a secondary consideration.

    In short, most will age in place. The big opportunity is to help them retrofit their existing homes to help secure rental income, accommodate adult kids/grandchildren and in due course an onsite carer – if they have the dough.

    But then we enter the world of town planning – which is whole different mind field.

    True some are selling and downsizing now, but mostly out of Sydney and to some degree Melbourne. This reflects the housing cycle and isn’t set to continue, because in the main the “let’s sell and downsize” just isn’t smart financially for most.