Retirees Downsizing is Good in Theory But Doesn’t Appear to Make Fiscal Sense in Practice
Earlier this week the Sydney Morning Herald ran an article entitled Scott Morrison urges retirees to ‘free up larger homes for younger families.’ As I read the article, the logic seemed sound to me but the thought that kept popping into my head was what’s in it for the retirees to do this?
The comments from Scott Morrison came on the back of an analysis which found that New South Wales and Victoria were sitting on a glut of 100,000 underused houses. Data from the 2016 Census showed that the population of Australia at the time of the Census was 23,401,892 persons and at the time there was at least 25,012,236 bedrooms. Let me explain this analysis in some further detail; 39,769 households reported as having zero bedrooms, 87,397 household had six or more bedrooms and 198,351 households did not state the number of bedrooms. If we assume the six bedroom or more households to just be six bedrooms we reach the 25,012,236 figure. To further highlight the under-utilisation of homes, many couples will share a bedroom so two people in such a household only actually occupy one bedroom. Similarly, many families have their children share a bedroom rather than occupy individual bedrooms. The flipside is that some households use a spare bedroom as a study, media room, rumpus etc. The point being, there are a lot more bedrooms than required.
According to the article, pensioners make up a large proportion of single people in large homes. So if we go back to the article’s headline, these pensioners should free up this housing supply for younger families. When you look at the numbers it actually makes very little fiscal sense for a pensioner to do so.
From July next year, Australians considering downsizing will be given the flexibility to contribute up to $300,000 from the sale proceeds of their home into superannuation as a non-concessional contribution. While this may be attractive, the family home is an asset which is currently exempt from the pension asset test however, the proceeds of any sale would count against the pension asset test. So let’s have a look at a case study.
If we assume a theoretical house that has been held for say 25 years and we assume the subject property is in Randwick in Sydney as the article specifically mentions this suburb as having a large number of large homes with only one person living in them. Twenty-five years ago, the median house price in Randwick was $307,250 compared to the current median price of $2,350,000. Notwithstanding that larger houses are probably more expensive than the median, based on this data the median house price in Randwick has increased by 665% over the past 25 years or $2,042,750. Over the 25 years the owners may have done some renovations however, the majority of the value increase has been due to the rising cost of land within a highly desirable inner-city area of Australia’s largest city.
If the owner of this theoretical house was to sell and we can assume they sell for the current median price ($2,350,000) based on 2% agent commission it would cost them $47,000 to sell their home. They would now have a lot of cash in the bank (cash which is receiving virtually no interest) and they could put $300,000 into superannuation but the proceeds of the rest of the sale would potentially count against any pension payments. The owner now also has to find somewhere else to purchase, for arguments sake let’s say they bought a property for $1 million which is around the current Sydney median house price. At a purchase price of $1 million the buyer would have to pay $40,767.60 in stamp duty. So for this person to sell their home in this scenario they are going to incur $47,000 in agent commissions when they sell, $40,767.60 in stamp duty when they purchase and the leftover cash they have will be counted against a pension they may or may not receive.
Based on my understanding of the taxation and pension systems, when you run the figures, it simply won’t make a lot of sense for many retirees to sell the family home and downsize. They will incur significant buying and selling costs and they may also impact on any pension they receive. Furthermore, the capital gains they have seen on their principal place of residence can be used to fund their retirement.
Whilst in theory retirees in large homes in desirable locations should sell down these assets and free them up for others, the financial reality is such that it makes little financial sense for them to do so. Retirees selling down assets to fund retirement should be a goal to ease the burden on the social security system however, the current system does little to facilitate that. As a first step perhaps the Federal Government should look to include the principal place of residence in the pension asset test. Although such a move is unlikely to be popular, it may provide the impetus for retirees to free-up underutilised housing.
Of course, I’m not a tax expert and I would welcome any feedback from individuals with a different perspective.