Empty nest to a family home: How downsizing could solve Australia’s housing shortage

As the government looks for solutions to Australia’s constrained housing market, Michael Pell, managing director of Propell Property, observed that downsizing could play a substantial role in freeing up housing stock and increasing turnover, but only if retirees have high-quality housing options to turn to.

According to Pell, as retirees “rightsize”, the influx of properties will help families and first time buyers find suitable housing. But what incentives exist for Australians to “rightsize” without significant transaction costs later in life?

What is currently promoting downsizing?

In a bid to address the housing shortage and promote downsizing among older Australians, the government made changes in 2022 to the Downsizer Superannuation Contribution program, enabling home owners aged 55 and over to contribute up to $300,000 from the sale of their residence into their superannuation funds, thereby enhancing their financial security while increasing housing availability for families.

This initiative is aimed at encouraging downsizing, allowing older home owners to tap into their property’s value while also enhancing their retirement savings. As the housing market continues to evolve, this measure provides a strategic way for seniors to optimise their financial futures without the burden of maintaining a larger home.

Eligible individuals are encouraged to consider this option as it supports not only personal financial growth, but also aims to stimulate the real estate market by encouraging movement between homes.

In addition to this, several Australian states and territories are stepping up to assist older home owners looking to downsize by offering stamp duty concessions. Such initiatives will alleviate the financial burden often associated with moving to a smaller property, saving eligible applicants tens of thousands of dollars in transaction costs.

Aside from government initiatives to support downsizing, Hometown Australia’s Land Lease living communities have been gaining attention as an appealing alternative to traditional home ownership.

These communities provide an attractive alternative for individuals looking for affordable living and a sense of community. Residents benefit from lower council rates and minimal upkeep requirements. Additionally, there are no stamp duties included, and individuals can retain all capital gains from their properties.

As part of ongoing efforts to encourage downsizing, a recent Better Housing for Better Health (BHBH) report highlighted that retirement villages save the Commonwealth approximately $1 billion annually by reducing the need for aged care facilities and promoting healthier living environments.

Michael Rabey, executive general manager from Igenia Communities, added that rightsized homes in these communities offer a bigger community with various amenities.

“We provide independent freestanding homes, gated with amazing community facilities from swimming pools, saunas, billiards rooms, cinemas – all the amenities that bring community spirit,” Rabey spoke of Igenia Communities.

These programs not only help individuals optimise their housing situations, but also contribute to broader economic growth by stimulating the real estate market, which can increase tax revenue and promote job creation in construction and related services.

Additional actions that could be taken and their anticipated impact

A recent report from the Retirement Living Council’s (RLC) BHBH revealed that only 26 per cent of Australians aged 55 and over have “rightsized” homes.

Craig Sankey, financial adviser at Industry Fund Services, stated that a major obstacle in increasing housing availability for first home buyers is the lack of incentives for existing home owners to sell.

This hesitance largely stems from the financial burden of stamp duty associated with home owners’ next property purchase.

Selling a home can also alter pension benefits, as profits from the sale are treated as assets, highlighting the reluctance to downsize.

Sankey noted that exempting home owners over 60 years old from paying stamp duty on their final home purchase would encourage downsizing and free up larger family homes, optimising existing housing resources.

However, Sankey emphasised that the probability of expanding the scope or value of these stamp duty discounts for downsizers remains uncertain.

As of the beginning of 2024, the RLC has advocated for reforms such as exempting part of home sale proceeds from the age pension asset test and lifting asset-free thresholds for retirees who buy cheaper homes within a year of selling.

RLC’s executive director, Daniel Gannon, suggested removing purchase price benchmarks for retirement community residents and aligning eligibility thresholds with rising housing prices. This change would grant those eligible access to Commonwealth Rent Assistance (CRA), reducing financial stress for retirement community residents and supplying “a more equitable playing field”.

With more homes entering the market due to downsizing, this approach can lead to price stabilisation or potentially lower prices in certain segments, combating rising property prices and making housing more affordable for younger buyers.

The RLC also calls for amended inconsistencies in the Home Equity Access Scheme (HEAS) to allow pensioners who own property to utilise home equity as security for government loans that supplement their retirement income. Currently, retirement community residents are excluded from the scheme due to their lease or licence agreements.

Alongside these actions, implementing tax credits for eco-friendly home improvements and promoting walkable communities could make downsizing more attractive to seniors. This increase in the supply of larger homes may also shift rental demand as areas previously dominated by family homes may see increased interest in rental units, affecting rental prices and availability.

Expanding the Downsizer Superannuation Contribution program could be another impactful approach to incentivise downsizing, including the possibility of increasing contribution limits and introducing additional tax benefits specifically tailored for downsizers.

These adjustments could enhance the financial appeal of the program and encourage more individuals to consider downsizing their homes while bolstering their retirement savings.