Government proposes an incentive for downsizing. What does this mean for pensioners and first home buyers?
Recently, Labor proposed a bill set to incentivise pensioners to downsize. Their proposal includes greater support and better terms regarding the social security assets test and deeming rates on pensions. The idea is to encourage more family-sized homes to go on market, which would provide more opportunities for families looking to buy to get into the market.
What is the proposed change?
Currently, pensioners in Australia are subject to the social security ‘assets test’ on the sale profits made when selling their principal residence, at the 12-month mark post-sale.
Pensioners who plan on using the capital from selling their home to purchase or build another are currently only exempt from the social security assets test for up to 12 months.
The social security assets test, when invoked, calculates how much a person is eligible for in pension payments by assessing the ‘income’ earned from financial assets – e.g. a house or house sale profits.
The amount of money that has not been reinvested into principal living arrangements by that time is used to adjust pensioners’ deeming rates – affecting their potential monthly payments.
The deeming rate is the amount of money the government deems to be your ‘income’ from your financial assets. It takes into account the income received from a financial asset regardless of its actual return.
In a market where interest rates and the cost of living are relatively high the potential loss of pension income is simply not an option for some.
The proposed change would extend the assets test exemption from 12 months to 24 months on principal home sale proceeds. This means pensioners get an extra 12 months before their house sale proceeds are assessed by the assets test. This would alleviate the immediate rush to buy again without facing a cut to their pensions.
The changes would also include reducing the deeming rate on sale proceeds intended to be used for a new residence from 2.25% to 0.25% a year.
Why is it bad if pensioners don’t downsize?
In our competitive market, younger buyers feel the strain of both high sale prices, intense competition and rising interest rates. As time goes by and families grow up, our houses get emptier. Kids move out, leaving behind a lot of space and upkeep that aging Australians simply do not need.
These family homes are ideal for young couples and families trying to break into the market.
However, with pensioners reluctant to sell up and downsize due to the impact on their pensions and quality of life, pensions, more of these prime properties remain off the market.
What will this proposed change mean?
If it passes, the Labor bill is aimed at encouraging pensioners to sell their family-sized homes in favour of smaller properties. This is set to free up more stock on the market for younger buyers and cool the competition a little – helping to bring the stock up to meet demand.
Social Services Minister, Amanda Rishworth 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.”
Will this bill actually help free up family homes for young buyers?
Rishworth states the bill aims to support pensioners ready to downsize, with the flow-on effect of increasing access and affordability of appropriate family housing for those who need it.
Pete Wargent, Property Economist and Co-Founder of BuyersBuyers, says, “Overall, it’s a practical suggestion to free up unused bedrooms and make more efficient use of the housing stock.”
He adds, “There were 13 million spare bedrooms in the 2020 financial year – up from 12.7 million in the previous 2018 financial year survey) – according to the ABS. So there are plenty of Aussies not using or needing those family-sized homes.”
If you are thinking of downsizing, here’s what you need to know
Why downsize?
Downsizing.com.au reports show that thanks to Australia’s long-term property boom, downsizing remains an increasingly lucrative tactic for older Australians looking to lock in a secure financial future into retirement.
A 2021 report showed that the average cash released from selling to downsize (from a house to a retirement village) in 2020 was $286,810.
Why consider downsizing in the current market?
Downsizing.com.au CEO Amanda Graham says even in this slowing market, prices are higher than they’ve ever been and there’s never been a better time to consider selling. Although the unexpected COVID pandemic property boom is ending, it’s still a great time to downsize.
Pete adds, “It’s potentially a perfect time to downsize because the pandemic saw a ‘race for space’ which sent many tenants and homeowners moving away from the medium and higher-density developments out to the regions.”
And inner city locations have never been better. Pete continues, “It’s a particularly good time to downsize if you’re looking to move to a location in inner Sydney, or inner Melbourne and (to some extent) inner Brisbane.”
“Things are normalising post-COVID, with the international borders reopening,” he concludes, “ so if you’re going to downsize, sooner rather than later would probably be smart.”
Where are the best places to search right now if looking to downsize?
Generally speaking, downsizers like to move to areas with:
- good walkability and transport
- proximity to amenities and shops
- ideally in unit blocks with lifts and not too many stairs
- an element of a relaxed lifestyle, whether close to the beach or somewhere quieter.
Sydney: Lower North Shore, Pyrmont, or the Eastern Suburbs – close to transport links.
Melbourne: the ‘Paris end’ of the CBD and the well-connected inner suburban locations, plus accessible and coastal suburbs like Elwood, Brighton and Brighton East.
Brisbane: the CBD, New Farm, Teneriffe, Bulimba and Toowong.
Here are some beautiful properties on Homely that fit the bill:
If you are a first-time buyer looking to get into the market, here are some helpful articles to get you started:
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