One popular way to increase housing affordability is to encourage elderly homeowners to sell their homes. John Daley, Brendan Coates, and John Daley of the Grattan Institute claim that while downsizing would impact your budget, it would make no difference to housing affordability. 

The idea behind the proposal is sound: Seniors would be encouraged to live in better homes, which would free up equity for retirement and allow them to buy larger homes for their children.

However, reality 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.

Seniors who are downsizing do not always receive the strongest financial incentives. “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 obstacles make it difficult to downsize.

It is possible to downsize without facing financial difficulties. The first is the possibility of losing your pension. because the family home is exempt from the pension assets test. Downsizing does not unlock any home equity.

The second requirement is that downsizers must pay stamp duty on any property 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.

You can get financial incentives

Federal officials suggested financial incentives to encourage people to downsize.

One proposal would exempt downsizers from both the $1.6m superbalance cap and the $100,000 annual limit for post-tax contributions. Only the richest retirees would be exempted, since only 60,000 have super funds.

Seniors could benefit more from proposals to exempt seniors of stamp duties when purchasing smaller homes. Property Council proposals would allow seniors the ability to quarantine a portion the proceeds from the pension assets test for up to 10 year.  

“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.

It’s rarely about how much money you have to move up or down.

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.

Due to restrictions on subdivision, there are fewer small dwellings within established suburbs. 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.

It has resulted in a decline in the number older Australians downsizing. They may choose to downsize because they prefer a different style of living or arrangement, difficulty in maintaining the property, or a desire for a luxurious lifestyle.

Seniors can be encouraged to downsize in more effective ways.  

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 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 may continue to receive their full pensions by borrowing against the value of the asset until it is sold. The federal government could then recover costs from the proceeds. The scheme will have little effect on retired people if it’s well-executed and planned. Instead, it would 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.”