Downsizing Trends & Baby Boomer Budget Incentives

As Sydney’s leading property buyer, Cohen Handler is seeing first-hand the downsizing trends being experienced across our capital cities. We explore the impact the recent budget’s downsizing incentives will have on baby boomers and some of the challenges they face.

Social researchers and the media, love to make ‘how they fare’ comparisons between millennials and the baby boomers and it does make for interesting reading. Much was made in the wake of this year’s budget about how first home buyers may be able to afford a house deposit if they cut back on their lavish lifestyles (and penchant for regular brunch). However, the latest NAB quarterly consumer behaviour survey found that in fact young people’s spending habits typically mirrored those of middle-aged consumers.

To the younger generation, the baby boomers may seem on the surface to have gotten a pretty good deal in life with their free university degrees and ability to buy large houses and often investment properties, but in their defence they have worked long hours and are facing their own unique financial pressures.

The 2008 Global Financial Crisis (GFC) played havoc with their share portfolios with many now facing a later retirement age than they had originally planned. Add to this the responsibility of ageing parents, the regular care of grandchildren, and the financial burden of children who are staying home for longer because they can’t afford that first home. They are certainly expected to take on a more supportive role than what was asked of their generation’s parents.

Many baby boomers are relying on their family home as their last reliable asset, which they will some time soon have to liquidate and downsize to fund a comfortable retirement.

While the housing boom currently being experienced across capital cities is obviously a major positive for empty nesters in theory, apartment prices in response to continual demand from Australian and foreign investors have also increased putting the squeeze on our downsizer’s nest egg funds.

Those who have already sold and decided to rent to ‘see how things go’ have seen the market shift even further out of reach, resulting in postponed retirement plans and what is a pretty confronting and uncomfortable financial position.

The 2017/2018 Budget introduced a raft of new incentives that aim to influence both supply and demand in the housing market and at least reduce some of the barriers of downsizing. These include amending the negative gearing rules, property ownership by foreigners, and superannuation contribution changes.

Negatively Gearing Changes

  • Babyboomers with investment properties will not be able to claim deductions for travel expenses between properties.
  • In addition, investors will no longer be able to claim the depreciation on the property more than once. Only the investors who actually incurred the outlay associated with plant and equipment (e.g. ceiling fans, dishwashers) will be able to claim the depreciation. To put this in perspective, before, one could buy a dishwasher for an investment property, depreciate it, then sell the property to you and you would depreciate the dishwasher again. You can’t do that anymore.

Downsizing with Superannuation

The most profound change in the Government’s 2017 Budget comes in the form of superannuation and housing.

  • Those over the age of 65 can sell their home, which is not subject to capital gains tax and contribute up to $300,000 of the sale into superannuation. The best thing is that both couples can do it.
  • The above mentioned $300,000 will be exempt from the age and work tests. Before, under Australian law a person is required to reach a ‘preservation age’ and if over the age of 65, must be working before they could contribute to super. The new downsizing strategy avoids these requirements, and in addition it does not add to the $1.6 million cap on superannuation. For example, a retired 67-year old with $1.5 million in super may be able to sell their property and plug an extra $300,000 into retirement savings.
  • The move comes into effect after 1 July 2018 and could significantly boost the retirement savings of baby boomers with most of their wealth tied up in their primary residence.
  • The only catch is you must have owned your house for at least 10 years. So in short the government wants you to get out of your big empty nest and sell it to a family.

Other changes that aim to help the downsizers

Mindful of the housing affordability issue, the government has made minor tweaks to laws to ensure that every property is treated as a home for someone and not a commodity that sits vacant.

  • Developers must sell at least 50% of new developments to Australian buyers.
  • Foreigners that leave the house vacant, will be slugged a fee equal to the foreign investment application fee when you bought the house (at least $5,000).
  • If you are a foreigner, any house you purchase will not be exempt from capital gains tax.
  • The above points means the downsizers should get a better look in with new stock being released.

Baby Boomer Property Trends

  • Cohen Handler has found increasing numbers of baby boomers looking to downsize in Sydney, Brisbane and Melbourne. As this is seen as their ‘forever’ home, we find these ‘last homebuyers’ are much more sentimental and emotional about the purchase – more so than investors or even first homebuyers.
  • Research has found that when older Australians do downsize, their decision is dominated by non-financial considerations, such as a preference for a different style of house and living, a concern that it is getting too hard to maintain the house and garden, or the loss of a partner. According tosurveys, no more than 15% of downsizers are motivated by financial gain.
  • That has certainly been reflected in our clients with the majority desiring low maintenance properties smaller than a family home but a sense of space is still incredibly important. Gardens have been traded in for sunny aspects and water views and it isn’t surprising that ‘no stairs’ is a standard stipulation on the wishlist.
  • Whether it’s a town house or an apartment, walkability to shops and cafes and the village lifestyle is important. Potts Point has many art deco apartments promising this lifestyle in the east. In the inner west Balmain and Drummoyne have lovely apartments that cater for this water view and café lifestyle.
  • Cohen Handler has assisted a considerable number of downsizers move from the northern beaches to the lower north shore from Mosman to Wollstonecraft. We recently helped one couple buy off market $100,000 less then market value of a $1.95 million property.

Cohen Handler is able to help downsizers understand the best value around each opportunity and assist them in buying the right property at the right price. If you are a looking to downsize and are concerned about where to start with your property search, contact us now.

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