Empty nesters and older Australians are being encouraged to sell large family homes and free up capital for retirement.

The recent surge in residential real estate prices across Australia’s capital cities has dramatically increased the financial windfall that can flow from selling at a market high and relocating to a new home.

Research shows that downsizing, or “rightsizing” as it is often termed, is an integral part of the current and future housing preferences of older Australians.

But a sizeable group of empty nesters have held back from the lucrative strategy. The recently completed Australian Housing Aspirations (AHA) survey, for example, found that only one-quarter of Australians make the move to downsize.

Of the 2,422 older (aged 55+) respondents to the AHA survey, 26 per cent had downsized, and a further 29 per cent have been tempted to take the plunge but taken no action.

But attitudes to downsizing could be in for a sharp change.

That’s because market conditions have rarely been so favourable for selling a large property at a price premium.

New analysis of housing data by consultancy Digital Finance Analytics (DFA) forecasts that more than 1.6 million households with property valued at about $1.6 trillion are planning to downsize over the next five years.

DFA expects Baby Boomers and some Gen-Xers to cash in on soaring property prices to boost their retirement income.

The flood of properties will ease pressure for larger houses, create more demand for low-rise, medium-density apartments and accelerate the shift away from major capitals, according to DFA’s analysis, reported in The Australian Financial Review.

Nelson Alexander company director Arch Staver says now is the perfect time to make real estate transactions if you are looking to take advantage of the increased value of large family homes.

“The situation right now for prospective downsizers seems to be one of advantage after advantage,” he says.

“If someone is considering moving from a large home to a smaller, low maintenance property in the next three to five years, it might be a good idea to bring that decision forward and really seize an opportunity.”

One of the key spin-off effects of the COVID-19 lockdowns in Melbourne is that homeowners with young families have become keenly aware of the importance of space at home. As a result, buyers aged from their 20s to early-40s are bidding up the prices of large homes on bigger blocks, often producing dramatic above-market sales results.

House price data from CoreLogic indicates that capital-city property markets are continuing to experience a significant price surge after the coronavirus-affected 2020 market worked to push up demand for more spacious properties sharply.

The latest Core Logic Home Value Index, released in June, revealed “extreme” price growth results and a bounce back from April when the market showed early signs of a slow-down.

Median house values were up 2.2 per cent across all the capital cities in May, led by Hobart, up 3.2 per cent to $574,543, and Sydney, up 3 per cent to $970,355.

Brisbane was up 2 per cent to a value of $574,572, while Melbourne was up by 1.8 per cent to $740,562.

CoreLogic research director Tim Lawless says while the May results are not as record-breaking as the peak in March, they still spoke to the strength of the boom conditions.

“We’re still seeing it’s not quite as rapid as it was in March, but 2.2 per cent is still extreme especially when you consider wages are rising by 1.5 per cent per annum,” Mr Lawless says.

According to Mr Staver, most of the upgrade purchasing activity in Melbourne’s property market is directed to homes that are currently owned by Baby Boomers.

“If those property owners are looking to downsize, they have all manner of opportunities in front of them,” he says.

“They can put money into superannuation or into one or more other properties.”

Mr Staver says those opting to sell a big house, such as a double-fronted property in inner-Melbourne, and then buy a renovated three-bedroom/two-bathroom single-fronted house will likely win on the upside.

“You are coming out of these transactions well ahead. And most importantly, you’re coming out ‘tax-free’ ahead.

“The family home still remains the one major asset that does not attract tax.

“The downsizer change works to increase your cash reserves. You can pump it into super, if you want. It is not unusual for someone who is selling a large home to be in a position to buy two properties – one is an investment, the other a house to live in.”

According to the DFA survey, almost 70 per cent of those planning to downsize are aged between 60 and 70 and about 17 per cent are older, based on a rolling analysis of 52,000 households. About 12 per cent are aged between 50 and 60.

More than 72 per cent of the houses expected to be sold by DFA have three and four bedrooms. DFA says an estimated $300 billion in profits from sales will boost investment markets and demand for retirement services, including leisure, recreation and travel.

The Australian Housing Aspirations survey found that older Australians perceive downsizing as more than just a reduction in dwelling size. Rather, it refers to internal and external spaces becoming more manageable, and a reduction in belongings. It also includes a financial benefit to the household.

“Many households are equity rich,” the AHA survey notes.

Downsizers are also being encouraged by changes in the recent Federal Budget allowing older Australians to boost their superannuation balance by contributing sale contributions without impacting concessional caps.

Rules allowing super contributions of up to $300,000 each ($600,000 for couples) from the sale proceeds of a principal residence owned for 10 years have been extended from those aged 65 to 60 from July 1 next year.

To find out more about selling or buying property in Melbourne, reach out to the team at Nelson Alexander today or drop into one of our offices for a chat.