Will higher interest rates boost interest in downsizing?
Having a mortgage as you age presents challenges at the best of times. For older Australians it could be a prompt to downsize.
Residz Team 6 min read
Until recently, it’s been hard to budge older Australians.
In 2019 the Australian Housing and Urban Research Institute (AHURI) reported that only 1-2% of Australians over the age of 55 were downsizing each year.
Sure it made sense when mortgages came cheaply and the kids were living at home for longer. Retired Aussies could probably afford to stay put and live fairly comfortably.
But with older homeowners carrying more debt into retirement and interest rates rising, will they finally bite the bullet and move to a cheaper home? Let’s chat about this.
More older Aussies in debt
Around 400,000 Australians a year will reach retirement age this year.
Looking at Australian Bureau of Statistics (ABS) data, more than 26% of Australian homeowners over 65 have a mortgage, up from 15% in 2003.
This trend has been driven by a range of factors, including rising house prices, increased borrowing for property investment, and changing attitudes towards debt and retirement.
No doubt the lower cost of money has played a big role in recent years; we all remember how mortgage interest rates dropped to a record low of 0.1% in November of 2020.
A tougher mortgage climate
Having a mortgage as you age presents challenges at the best of times. It impacts your cash flow and reduces your ability to access home equity.
With rising interest rates (now averaging about 6%), a tougher mortgage climate is no doubt concerning many older homeowners struggling to meet the higher payments on their fixed or reduced income. Finder.com.au says the average Australian home loan size in December 2022 was $604,346.
At the same time there’s also been a shift in how Australians view their lives and lifestyle. The COVID-19 pandemic spawned both a love of homemaking and a restlessness in many demographics, and older people are not immune to that.
What is downsizing?
Downsizing refers to the process of selling a larger property, such as a family home, and buying a smaller one, often after children have left home or when the owners retire.
“Their home is their largest asset, and releasing equity is often the key to their own financial security and independence during their retirement years, as well as helping their adult children become homeowners,” explains Downsizing.com.au co-CEO Amanda Graham.
What are the benefits of downsizing?
During COVID-19, a survey by Downsizing.com.au and OverSixty.com.au found 62% of respondents were considering downsizing to be in a “supportive and helpful community” and live in a “modern low-maintenance home”.
Other reasons why people choose to downsize include:
- Releasing equity from their home to fund retirement or other lifestyle goals (or their kids’ goals).
- Reducing living expenses, such as maintenance and utility costs.
- Simplifying their lifestyle and living in a more manageable property.
- Moving closer to family or friends.
- Moving to a more desirable location, such as a beach or country town.
Plus, the COVID-19 pandemic might have accelerated some people’s plans to downsize due to opportunities for remote and hybrid work, the desire for a simpler lifestyle, and changing lifestyle needs.
For example, it’s thought the pandemic pushed more adult children to leave the family home to create their own households.
Post-pandemic, we’re seeing more push factors for downsizing. Cost of living expenses mean older homeowners (and renters) increasingly struggle to make ends meet. Building and renovation costs have increased, reducing the appeal of making alterations.
How many Australians will reach retirement age in the next five years?
According to the Australian Bureau of Statistics (ABS), the number of Australians aged 65 years and over was 3.9 million in 2020.
The estimated number of Australians who will reach retirement age (65) increases each year for the next five years. There will be 406,700 in 2023, 401,900 in 2024, 412,100 in 2025, 414,200 in 2026, and 416,300 in 2027.
Lots of large homes to sell
Although downsizing could mean moving to a same-size cheaper property in a different location, let’s look at how many potential large-home candidates there would be for downsizing.
According to the 2016 Census of Population and Housing conducted by the ABS, approximately 77% of all private dwellings in Australia had three or more bedrooms. This equates to around 7.6 million private dwellings.
With many of those in the hands of older Australians, could we see a surge of these larger homes being put on the market?
Reasons we choose not to downsize
There are several reasons why some older homeowners choose not to downsize to a smaller home. They include:
Emotional attachment to the family home: Many of us will form strong emotional ties to our family home, especially if we’ve lived there for a long time and raised our children there. We may be reluctant to move to a smaller property that doesn’t hold the same sentimental value.
Financial considerations: While downsizing can release equity and reduce living expenses, it can also come with costs such as real estate agent fees, stamp duty, and moving expenses. Some owners of larger homes may find that the costs of downsizing outweigh the financial benefits, especially if they already own their home outright.
Too much work: Packing up a large house and moving to a smaller one may take a lot of work, much of it emotional (as the owner is forced to part with possessions).
Lack of suitable housing options: Right now property listings are low (especially in regional areas popular with downsizers). Downsizers may find the limited options available don’t meet their needs or preferences.
Fear of the unknown: This is a biggie. Moving out of your neighbourhood and/or moving to a smaller home can be a significant life change, and older homeowners may feel anxious or uncertain about leaving their community or comfort zone.
Desire for space and comfort: Some may simply prefer the space and comfort of a larger home, especially if they enjoy entertaining guests or have hobbies or interests that require extra space.
Financial incentives for downsizing
Given downsizing is often to free up money, it’s worth looking at what financial incentives are in place for property downsizers. Some include:
The downsizer contribution to superannuation: This incentive allows eligible individuals who are 65 years or older to make a one-off, post-tax contribution of up to $300,000 from the proceeds of selling their home to their superannuation account. This contribution is in addition to the existing contribution caps and can provide a tax-efficient way for downsizers to boost their retirement savings.
Stamp duty concessions: Some state governments in Australia offer stamp duty concessions or exemptions for eligible downsizers who purchase a smaller home. For example, in Victoria, eligible downsizers who purchase a new or established home worth up to $1 million may be eligible for a 50% stamp duty concession.
Capital Gains Tax (CGT) exemptions: Downsizers may be eligible for a CGT exemption if they sell their primary residence and meet certain eligibility criteria, such as living in the home for at least 12 months prior to sale and not using the property for income-producing purposes.
So, will we downsize?
Interest rate rises and cost of living will most certainly have an impact on the timing of older homeowners choosing to downsize. But, they may wait until the real estate market picks up to make their move.
It’s probable that the COVID-19 pandemic has had an impact on Australians’ appetite for downsizing as more people have spent time at home and may be reconsidering their housing needs and preferences.
It remains to be seen whether downsizing to a smaller home will become more popular for older homeowners in the coming years, or whether other trends such as multi-generational living or aging in place will gain more traction.
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References:
Image: Esther Ann unsplash
Australian Bureau of Statistics
Downsizing contributions into superannuation, ATO website
Pensioner concession, State Revenue Office Victoria
Real Estate Assets , NSW Govt website
Housing initiatives for seniors, Property Council of Australia