Why isn't downsizing happening ... we think it's largely about the costs involved and a lack of perceived value in moving home
Almost everyone thinks that downsizing is a good idea. It frees up housing which has grown too big and costly for retirees to maintain, and allows them to access some of their capital and perhaps more fully enjoy their retirement. So, why isn't it happening more often?
Lets look at some figures below, and as usual they are based on us making the following, hopefully reasonable, assumptions:
- You want to downsize into a smaller property and generate a reasonable amount of cash to make the process worthwhile and provide better living standards in retirement. The target is to move into a smaller residence priced at 70% of the value of your present house - your present house is assumed to be worth $1 million dollars in all capital cities, with the exception of Sydney and Melbourne, where the assumption is $1.5 million.
- We assume that the agent's commission on sale will be 2%, and marketing costs which vary between $6000 and $7000 - acknowledging that there is large scope for variability in this regard, and also the cost of removals at $3000.
- We assume that neither member of the couple is eligible for a pension, and therefore stamp duty concessions
The major issue in the analysis is whether you can actually find attractive accommodation at 70% of your sale value, in the same broad locale. Currently, we believe that this type of accommodation is being priced at a substantial premium to the market, particularly if it is new, and this may totally eradicate any financial incentive to downsize - unless you are willing to consider moving outside the major urban areas.
The costs of selling your property - the first part of the equation
Let's look at some of the costs attaching to the sale of property across a number of examples in Australian capital cities in 2019.
The cost of buying a smaller property and net cash available after sale and purchase
Lets look at some of the costs attaching to the purchase of property across a number of examples in Australian capital cities in 2019, and the net cash generated after the sale and purchase.
|Price||Stamp Duty||Mortgage & Transfer Fee||Legal||Total Costs||Net $ after Costs|
|* It is assumed that the individual/couple do not qualify for the ACT's Pensioner Duty Concession Scheme, as they are not eligible pensioners. ** It is assumed that there is no qualification for the NT's pensioner concession scheme, and in any event it ceases entirely where a property value exceeds $750,000 - other concessions may apply however. *** Concessions may be available in Victoria to Commonwealth concession card holders on property valued up to $750,000.|
So, just the cost of transitioning to a new home in the above examples is between $50K and $90K - very substantial frictional costs.
What about moving into a Retirement Village?
According to the PwC/Property Council Retirement Census of November 2018, the cost of an "average two bedroom ILU (independent living unit)" was 64% of the median house price across Australia. That is broadly consistent with the figures with the figures we've used above, but the Census also notes that, "ILUs in newer villages are generally priced closer to the postcode median house price". So, we have a slightly extraordinary position, as we see it, of new two-bedroom retirement units costing as much or more than average houses in the same locale.
So, moving from your house to retirement village may in practice not generate any net funds and, importantly, the average age on entry to a retirement village is mid 70's - not "over 55" as much of the marketing bumpf would have you believe - see the above Census report.
Retirement village operators often highlight in their marketing material that moving into a Village, because you will be occupying your property on a license or lease basis, doesn't give rise to stamp duty. That's entirely correct, but as you can see from the above tables, whilst stamp duty is an important cost component, it should not be the only consideration.
You also need to consider that most retirement village contracts will provide for deferred fees that will constitute between 30% and 40% of your purchase price after six or seven years of accommodation. Therefore, if you purchase a unit for $700,000 initially, and need to move into aged care facilities after seven or more years, you may only have capital of $455k to fund your refundable accommodation deposit (RAD).
That may not be adequate for a couple, although we think RADs actually overstate the amount of capital you need to keep available. At least where you are occupying your own home you are not seeing your capital eroded, and there is a greater prospect of your keeping pace with increases in aged care fees and accommodation deposits which appear highly leveraged to real estate prices and costs.
It is still not entirely clear whether provisions which allow persons aged over 65 to make a "downsizing contribution" to superannuation of up to $300,000 on or after July 1, 2018 have provided much new impetus. We think that it may be attractive for individuals and couples who are already in a good asset position and unlikely to qualify for an Age pension - otherwise the release of capital, if it counts for the Assets test, may be unattractive. We also believe the qualifying age should have been set at 60, but presume the cost was considered too high.
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