With new rules set to take effect from 1 July that allow downsizers to contribute funds from the sale of their home to super, should developers and agents be preparing for a burst of downsizer activity?
Some pundits are tipping the property market could enjoy an uptick in activity from 1 July when the federal government's new home downsizing program takes effect.
First, let’s recap how it works.
From 1 July 2018, home owners who are aged 65 years or older can make a downsizer contribution of up to $300,000 to their super fund (more on this shortly). It’s a non-concessional contribution so it won’t be taxed but more importantly, it won’t count towards contributions caps. Put simply, even if you have more than $1.6 million in super, you can still take advantage of the downsizer contribution.
For home owners who sell their place and opt to make a downsizer contribution, there’s no requirement to purchase another home. And each member of a couple can contribute up to $300,000 individually. So if a couple makes a profit of $500,000 on the sale of their home, a total of $500,000 can be added to their super in whatever proportion they choose. They can opt to contribute half ($250,000) each, or split it – for example, $300,000 for one and $200,000 for the other.
Predictably, conditions apply. Among them, the contract of sale must be exchanged on or after 1 July 2018. The home must have been owned for at least 10 years prior to sale, and ‘home’ in this context doesn’t include a caravan, houseboat or other mobile home.
Will downsizers take advantage of this new option?
Good question. On one hand, empty nesters who have owned their home for some time are likely to have tremendous equity built up in their property.
A report by the Bank of International Settlements (BIS) found house prices in Australia have surged 6,556% since the 1960s — an average increase of 8.1% annually.
Looked at another way, the median price of a house in Sydney in 1970 was $18,700. Figures from CoreLogic tell us that the median house price in Sydney is currently $1.041 million. Enough said.
The BIS report also observes, "One striking feature of house-price growth is its persistence". So chances are, empty nesters will continue to reap capital gains on their downsizer property.
A possible stumbling block
However, research tells us that one of the key stumbling blocks for downsizers is the challenge of finding suitable properties.
A study by National Seniors Australia (NSA) found a growing number of downsizers want to live in medium to high density surroundings. But they also want to remain part of the community and not in a ‘them and us’ accommodation arrangement. In other words, the traditional retirement village may suit some people but the NSA paper notes, “generally there is an aversion to such concepts”.
NSA made another interesting point. It says, the “dearth of appealing housing stock seems to stem, in some cases, from a lack of innovation and flexibility in terms of development, planning and design”.
And this gets to the nub of the conundrum that downsizers may face. They can potentially sell the family home yet find themselves all cashed up with nowhere to go unless a suitable downsizer home is available. And for anyone who has owned their own home for over a decade, that’s unlikely to be a palatable strategy.
What’s the answer?
Again let’s take a look at what NSA have to say: “Sadly, it seems many people still regard accommodation for older people to be either the family home or one of two types of destinations: a retirement village or a nursing home”. The latter choices usually involve gated concepts that may discourage interaction with the local community, and clearly that’s not what empty nesters want.
The solution lies partly with developers. Baby boomers and empty nesters have the weight of numbers, and from 1 July 2018 they will have the weight of a financial incentive to downsize. It’s a call for property developers to go beyond what has been done in the past.
Diverging from the status quo takes courage, and yes, there can be legal, planning and policy barriers to taking mixed age developments forward.
Nonetheless, the three factors that downsizers are looking for – good design, convenience and connectedness to the local community are pivotal. If developments can pass muster on these scores, only then will the changes to super rules pass the “what’s in it for me?” test among downsizers.
Greg Oddy is the Director of Sales and Marketing for SeniorsHousingOnline.com.au and Downsizing.com.au
 Interest rates and house prices in the United States and around the world, October 2017 https://www.bis.org/publ/work665.htm
 Housing prices in Australia: 1970 to 2003 http://www.econ.mq.edu.au/Econ_docs/research_papers2/2004_research_papers/Abelson_9_04.pdf
 Seniors downsizing on their own terms: Overcoming planning, legal and policy impediments to the creation of alternative retirement communities, November 2015 https://nationalseniors.com.au/system/files/09151399PAC_SeniorsDownsizing_Report_FN_Web.pdf