Why Retirees are Reluctant to Downsize

When taking a holistic approach to what makes house values rise, retirement costs are an obvious contributor.

I have argued that because of favourable tax treatment and finance structures, housing presents an appealing investment for individuals who are facing health and aged care costs.

This could be part of why investment in housing has increased so rapidly over the last two years, even overtaking owner occupiers in terms of the amount of money borrowed from lending institutions for housing purchases in 2014. 

However, new evidence suggests that when it comes time to finally enjoy the wealth stored in housing assets, retirees are reluctant to do so.

A report released by the Productivity Commission showed that, despite being asset-rich, many Australians over 60 are unwilling to sell their homes to help fund retirement.

The report, titled ‘Housing Decisions of Older Australians’ notes that residents aged 65 and over have a combine $926 billion in home equity, compared with just $339 billion in superannuation.

It also highlights that in 2011-12, households aged 65-74 years old had an average of $480,000 equity in their homes.  

Onthehouse.com.au data shows that the median house in Australian has gained a further $87,000 between 2013 and 2015.

As people get older and can no longer work, the family home represents a larger share of an individual’s wealth.

It seems obvious that the family home could be sold and a cheaper perhaps smaller and low maintenance property could be purchased – with the gains made used to fund retirement.

Melbourne and Sydney dwellers would be in a particularly good position – the median house in these cities have increased by $126,000 and $309,000 respectively in the last two years.

So, why do retirees need convincing to sell the family home for retirement?

While there could be an array of reasons, there are three solutions that stand out that could save the country billions of dollars and assist younger generations in getting a foot onto the property ladder.

1. The Means Tested Pension

An owner-occupied home (the family home) has favourable tax treatments for accumulating wealth.

Retirees receive a ‘means tested pension’, which means the government may provide poorer households with more pension welfare. 

The means tested pension does not take the value of the family home into account.

If you live in the property you own, the value of that home is exempt from means testing of the aged pension.

However, selling the family home to downsize means that the gains from the sale of the property could reduce the pension received.

This rule, coupled with other psychological factors, suggests retirees might hold onto the family home to maintain a higher pension.

In February this year, Residex founder John Edwards wrote about these concerns, making the argument that the value of the family home over $400,000 should be included in means testing for the pension.

He argued this would more quickly incentivise the sale of the family home.

2. Confusing Tax Structures

The report outlines that the sale of the family home is exempt from capital gains tax. 

This means retirees who have made money on their property over the years would not have to pay tax on those gains.

A significant cost in the later stages of retirement is the refundable residential aged care deposit, which according to the Productivity Commission report is $330,000.

However, retirees who are lucky enough to own in the Sydney market would have made close to this in their homes over the last two years alone.

While the exemption of the family home from capital gains tax could incentivise the sale of the family home for retirement, other taxes take away from reaping wealth.

The report references studies which demonstrate that stamp duty, or the tax paid on the transfer of property, can result in disincentive to downsize.

This is because it raises the cost of mobility and eats into the equity gained in the family home.

It is worth noting, however, that stamp duty reportedly deterred only a small portion of those surveyed by the Productivity Commission.

3. Cognitive Constraints

Individuals develop fond attachment to the family home, as well as perceive it as a place of secure residence.

As unit values rise along with houses, retirees may be reluctant to downsize because it could create outstanding debt for them.

Retirees have expressed caution around letting go of what is typically their largest value asset, because of uncertainty about the future.

Interestingly, 44% of retirees in survey responses expressed the importance of holding onto the family home as something to pass onto their children.

The report argues that while less retirees hold this attitude now compared with previous decades, the dollar value of bequests from housing is increasing.

Ultimately, the majority of retirees do see their current housing assets as keeping them through retirement, to the end of life.

However, because of uncertainty around aged care, health care and longevity, people aged over 65 are taking higher precautions around their savings and holding onto the family home for longer.

The report concludes that more information about such services can help change savings patterns among retirees.

Given the incentives created by uncertainty in health and the tax and superannuation systems, you can’t really blame retirees for believing they should hold onto the family home for longer.

It is clear that these systems need reviewing in order to ensure the security and wellbeing of retirees, as well as releasing larger family homes for young families in Australia.