Baby-boomer upside beckons for expanded ‘downsizer’ housing scheme

A fresh bid to encourage older Australians to downsize their homes may work better this time round. Here’s why.

Remote working has made bigger houses more popular again.

Among a string of flagged adjustments to superannuation-related schemes in the Budget, a move by the government to reduce the access age to the super downsizing scheme’ from 65 to 60 may just move the dial for older investors.

As homeowners become older they are less likely to move house and a reworking of the scheme against a backdrop of strongly rising property prices is expected to encourage wider participation in the program.

Moreover, post-COVID larger family homes targeted by the scheme have become more popular with a range of recent surveys showing property buyers are again aiming for bigger houses as working from home has become more popular.

‘It’s good to see, a very welcome move, ‘ says Shelley Banton, head of education at ASF Audits.

Aimed at ‘asset rich- income poor ‘retirees, the downsizer scheme was launched in July 2019: It allows older Australians to sell their homes and make contributions to super with the proceeds — the contributions can be made over and beyond the existing rules which restrict contribution amounts.

Overall, the downsizer scheme has had limited success to date. There have been 22,000 applicants which pales in comparison to related schemes targeting the housing sector such as the HomeBuilder scheme which has had 120,000 applicants.

But the lower age access limit should expand the popularity of the scheme primarily because it aligns the access age of the scheme with the age the majority of Australians can access their super.

The downsizer scheme appeals to two groups of older Australians living in houses that are larger than they need: The first group are those who have not put enough into super and are restricted in doing so at a later stage in their lives - there is no age limit on the downsizer scheme.

The second group are wealthier Australians who have already ‘maxed out’ on their super breaching the super ‘cap’ of $1.6m which is the maximum that can be used to fund a tax free pension. (This maximum will move to $1.7m on July 1 this year under indexing changes).

In the two years since the launch of the scheme investors and advisers have also become more familiar with the specific terms of the program which is restricted to homes that have been owned for at least a decade. The downsizer contribution to super - which has a maximum limit of $300,000 - must also be made within 90 days of receiving the proceeds of a home sale which is usually at the date of settlement.

The scheme also allowed older Australians using the scheme to sidestep the much maligned ‘work tests’ which affect those between 67 and 74.

The challenge for the government will be whether substantially more older Australians will be prompted to downsize.

However, it is understood the Budget will announce the scrapping of the entire work tests rules regime. (Under the ‘work tests’ , you cannot contribute to super unless you are gainfully employed for 40 hours in a consecutive 30 day period)

More broadly, the key item of resistance to home downsizing does not appear to be financial. Rather it relates to emotional attachment to a neighbourhood where it may be difficult — or not feasible economically— to move to a smaller home. (Houses that are half the size in the same neighbourhood are rarely half the price).

The challenge for the government will be whether substantially more older Australians will be prompted to downsize primarily because they can improve their super situation when the lower age limit kicks in from July 1 2022.

A report from the Grattan Institute on downsizing found a variety of fundamental restraints to the potential success of the downsizer scheme without wider changes in the tax system.

The report found that when people want to downsize, financial incentives are not the primary issue: It also said that the risk of losing access to the government pension was a key financial restraint. (Homes are exempt from pension access tests, if a home is sold or traded for a smaller residence any extra capital produced could be counted against pension access ).

“All up it means that the program might become more popular, and that may make changes to housing at the margin, but the restraints to downsizing remain pretty serious, “ says Brendan Coates, household finances program director at the Grattan Institute.

Originally published as Baby-boomer upside beckons for expanded ‘downsizer’ housing scheme