Will downsizing incentives make housing more affordable?

Older Australians will be given greater financial support to downsize from their family home to a new property under legislation introduced to parliament by the Labor Government last week.

The Incentivising Pensioners to Downsize Bill 2022, which is currently before the House of Representatives, would allow more downsizers to maintain a higher pension rate than they would currently be eligible for if they sold their home and purchased a new one.

To ensure that, the government is aiming to change both the asset test exemption and the deeming rate which apply to downsizing pensioners:

• Asset test exemption: At present, proceeds gained from selling a home which are intended to be used to purchase another home are exempt from the pension asset test for 12 months. This exemption period would be increased to 24 months.
• Deeming rate: Typically, the deeming rate applied to the proceeds of a home sale is currently 2.25%, but this would be lowered to 0.25%.

The Minister for Social Services, Amanda Rishworth, argues that while the changes are targeted towards home-owning pensioners, the benefits will also flow through to younger homebuyers.

"We don't want people putting off downsizing to a more suitable home because they are concerned about the impact it could have on their payment rate and overall income," she says.

"These changes will give pensioners more flexibility to find a suitable new home and it will hopefully free up larger housing stock for younger families who need it."

How much could the changes save downsizers?

Because of the different variables at play, the savings that come about from the proposed changes will vary case-by-case. But in an address to parliament last week, Rishworth cited two examples in which pensioners stood to save hundreds of dollars per fortnight.

As part of the first example, a couple on the maximum pension rate have sold their family home for $1 million and are planning to use $800,000 of the proceeds to build a new home. Under the existing rules, Rishworth notes that the couple's pension would be reduced by around $229 a fortnight, whereas if the new legislation comes into effect, they will keep their full pension rate.

In the second scenario, a single pensioner has sold their home for $600,000 and are planning on downsizing to a smaller apartment which also costs $600,000. At present, their pension would be cut by roughly $143 a fortnight, but under the proposed changes it wouldn't be altered at all.

Will this help with supply or affordability problems?

Over 8000 pensioners made the decision to downsize last year - a figure which the government hopes will grow if its financial support measures for empty nesters are enacted.

Dr. Michael Fotheringham, the managing director of the Australian Housing and Urban Research Institute (AHURI), says that this will be a relatively modest piece of the government's larger housing policy puzzle though.

"There will be some households in the post-retirement age group that will find this appealing," he says.

"It will remove one of the main barriers for them in the sense that if they are receiving a pension, the home they're in won't count towards their asset calculations, but once they sell it, the financial return potentially will. This gives them a couple of years to sort that out, and the deeming rate on it is capped at a lower level, so there's the removal of a financial disincentive there.

"But this is just one step to help us more efficiently use the housing we've got so that those who don't need a large house with multiple bedrooms, a backyard and all the rest of it can move to something that's perhaps a more appropriate size for them, and then a young family can move into that house."

The policy has raised concerns though. Chief among them is the idea that a greater influx of downsizers could end up competing for smaller houses and apartments with first home buyers - a group which has rapidly retreated from the market as prices and demand has soared.

However, Fotheringham thinks that the crossover between the two cohorts isn't likely to be as prevalent as some expect.

"It's possible, but I would have thought that they're likely to be looking at different properties than first home buyers. But equally, someone occupying a house is competing with a potential new occupant of that house, so I'm not sure that it's a reason not to consider it as a policy."

How else can downsizers be encouraged to sell up?

In addition to removing some of the financial barriers currently in place, Fotheringham believes that there are other policy measures that both federal and state governments could consider in order to promote housing mobility and free up more family homes.

"In terms of the financial disincentives to downsize, the biggest after this move, I think, is the cost of stamp duty. So, anything that offsets stamp duty or moves to a land tax model, as we've seen in the ACT and we're hearing about in New South Wales, would certainly be a positive contribution," he says.

"I think an even bigger issue is actually about the diversity of housing stock at a neighborhood level. When people downsize, they're not likely to want to move across town to an area they don't know. They're going to want to stay in their local area where they're connected to their GP, their family and to the community around them.

"So, it's important that we have a diversity of housing stock at a local area level rather than whole suburbs of three bedroom houses and whole suburbs of tower blocks."

Ultimately though, Fotheringham says that downsizing policies need to go hand in hand with other reforms if the government is going to make headway into Australia's broader housing issues.

"We need to be thinking about the efficient use of our housing stock, about supply, about rental markets that are in real trouble at the moment and about social and affordable housing.

"We can't just focus on one part of the market and hope that the rest of the market will sort itself around that. It doesn't work like that, and we need to be coordinated in our approach, so it's very encouraging that the new federal government recognises that."

Thinking about downsizing yourself? Make sure you're up to date with all of the latest age and contribution changes related to downsizing and superannuation which are included in our roundup of the July 1 super changes.

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