The downsizing dilemma and why it’s not for everyone

Downsizing is about to become a very big business but it may not be the most profitable move for you.

If you live in downsized property you are in the property class that is going to be in hot demand.

If you are even remotely sceptical about how Australia is about to enter a downsizing boom look no further than Mirvac.

This week the property giant announced a $1bn deal where the company will develop small scale units aimed at downsizing Boomers.

A key factor for Mirvac was the hard numbers on Australian demographics – we have an ageing population and a significant proportion of that group will soon want to move to more suitable, less troublesome accommodation than a large family home.

The backdrop to the Mirvac’s deal which involves more than 6000 affordable sites in ‘renowned retirement areas’ is plain to see.

There is a housing crisis, there is nowhere to rent in the major cities, there is an undersupply of housing stock on the market and there is very little to choose from in the way of ‘downsized’ accommodation.

Yet even in the limited cohort of Australians who have taken advantage of the superannuation downsizer scheme (which gives empty nesters an incentive to switch money from the family home into super) we can see that 50,000 have already signed up to take part.

Moreover, there is also a policy shift in Canberra where the government would like to see ‘denser’ cities and less of older Australians ambling around four-bedroomed houses in the outer suburbs.

The number of people over 55 is set to double to 14 million by 2063.

Make no mistake. A lot of money is being bet on the downsizing trend.

Industry figures suggest the number of people over 55 is set to double to 14 million by 2063 and perhaps one in four of that group will seek to ‘downsize’ at some stage. It is early days here with most people still deciding to downsize when they are between 70 and 80. But if corporate Australia and the government have anything to do with it, that age range will move younger very quickly.

Just watch what happened with the super downsizer scheme. Initially was only open to those over 65 – In recent years under both Coalition and ALP governments it has been nudged downwards – it can now be accessed by anyone over 55.

In fact it looks like everyone from policy makers to property developers would like you to downsize – but should you?

Harsh realities

Financial advisers suggest there are two major factors that hang over the financial success of moving to downsize: The first is stamp duty which is a major impost on any transfer of properties.

Stamp duty is a state-by-state consideration and downsizing is another argument against this notoriously unpopular tax. It is quite literally a tax on mobility, you pay every time you move from one home to another: Keep in mind that the median price ‘home move’ is hit with around $40,000 in stamp duty based on current prices.

The second is that moving house -even to a smaller one- when you still have a mortgage on the original home is unlikely to be financially efficient.

If you still have a mortgage, it will certainly limit your choices. Worse still, if you have a mortgage – and you have just come off a fixed rate and into a much higher rate – then your capacity to finance a downsizing has most likely gone backwards.

This is another underestimated dimension in downsizing, retiring with a mortgage was rare not that long ago, now it is quite common. In fact, in the last reported year - 2020, the portion of homeowners with a mortgage in the 55 to 64 age range was 54 per cent - double the level of two decades earlier.

A third common factor is less obvious: Downsizing will not mean a much cheaper lifestyle if you move within the same immediate neighbourhood where per square metre your downsized accommodation may actually cost more. To save money on the move itself you would have to move to a much smaller house ideally in a cheaper neighbourhood to achieve some significant savings.

Small comforts

After watching my own parents live in the same family home since 1975 - and the endless visits from tradies who were tasked with trying to keep the place from slowly deteriorating I went in the opposite direction and ‘downsized’ the same year our youngest finished school. We stayed inside the same district with the same Council so, needless to say, the upfront savings were nowhere to be seen.

After two years in ‘downsized’ accommodation, there are a range of issues that have now come to light.

Some of the negatives of downsizing will never be mentioned in those glossy advertisements we see from the super industry or property developers.

There are serious hidden costs in downsizing – stamp duty is the standout, but there are many new costs in setting up a new home – everything from your insurance details to your plumbing bills will change.

There is also a type of opportunity cost related to downsizing that is difficult to measure, but entirely valid nonetheless.

You can’t for example, offer to share the use of the family home to help your extended family in some way. Let’s say an adult child and their family wished to live with you for a month for some reason. In a small house it would not be feasible.

There are serious hidden costs in downsizing – stamp duty is the standout.

On the other hand, if you hate gardening or attending to practical jobs around the house, downsizing will suit you just fine.

But if you change your mind and suddenly develop an interest in rose bushes or beekeeping or whatever you can’t get that quarter acre back.

It won’t come up in any spreadsheet but there is also a hidden cost in replacing a lot of items. Once you downsize you realise almost everything from the ‘old house’ is now too big. Your kitchen table, your couch, the family dog.

Yes, I’m afraid that multiple burner barbecue that could take ten steaks at a time is now is now an absurdity in your handkerchief-sized garden.

But once you’re are finally ‘in’ then the picture improves – The real savings are from this point onwards. All ongoing bills are smaller – and this is very welcome now that we have seen energy bills go through the roof.

In fact, if you live in downsized property you are in the property class that is going to be among those most in-demand in the years to come – that’s why Mirvac bet big on it this week.

Originally published as The downsizing dilemma and why it’s not for everyone