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PC News - March 2016

Housing decisions of older Australians

In a recent research paper, the Commission examined the housing choices of older Australians. The analysis found that older Australians are increasingly remaining at home until very old age, and are generally net savers from an early point in retirement as unrecognised wealth embedded in the family home increases. The nature of policies affecting retirement incomes is not necessarily serving the interests of retiree living standards.

Housing is integral to people's wellbeing. It serves the basic human need for physical shelter, contributes to physical and psychological health, and provides emotional security. In Australia, the vast majority of older people live in their own homes and generally prefer to age there - and by extension in their local community - throughout their retirement. However, as people age, their housing and care needs change, making it potentially difficult to 'age in place'. People are more capable of ageing in place if their house can be modified, they can access home care, or they can move into suitable age specific accommodation within their local community - such as a more suitable home, retirement village or mobile home community.

Most older Australians do not 'downsize' to a smaller home in retirement because they prefer to age in their current home or because there is a lack of suitable and affordable options within their desired community. Therefore, many older Australians' homes tend to have one or more spare bedrooms. This is not necessarily a problem - older people are generally satisfied with their homes and tend to find other uses for spare rooms, such as hobbies. A small proportion of older Australian households are renters. Renting in old age is often a necessity rather than a desirable choice of tenure; older renters tend to experience more housing affordability stress and face less secure housing tenure than home owners.

Most people entering permanent aged care are 80 years or older

For those older Australians who require a high level of care and are no longer able to age in place, residential aged care is an option. In Australia, most people who enter permanent care are 80 years and older due to greater longevity and delayed morbidity. Further, the average duration of stay is quite short - around 2 to 3 years. These trends show that residential aged care is increasingly turning into an end of life option.

Some reforms in aged care policy - such as the expansion of home care - are supporting ageing in place. In addition to being what older Australians want, home care generally requires less government funding than residential aged care. However, some policies can limit the flexibility of age specific housing to cater for the needs of older Australians. State and local government planning and development approvals also create barriers to expansion and innovation of age-specific housing.

Most older Australians are home owners

  • This figure shows the proportion of population over 65 in 2011, living in different housing options:
    * Home owners (excluding age specific housing) accounted for 73.4 per cent of the population. Their average age was 74. 
    * Private rental accommodation accounted for 7.3 per cent. The average age of older tenants was 74. Private rental often involves high costs to the tenant (as a proportion of income, and offers low security of tenure.
    * Social housing accounted for 6.1 per cent, and the average age of residents was 75. Compared to private rental accommodation, social housing involves lower costs and higher security of tenure. 
    * Residential aged accounted for 6.6 per cent. The average age of residents was 84.5, and the average length of stay was 2-3 year. The costs for residents depend on means-tested subsidies. 
    * Retirement villages accounted for 4.5 per cent. Average age of residents was 81, and they stayed , on average, for 7 years. This housing option requires high entry costs, but often involves lower ongoing costs compared with manufactured home estates. 
    * Manufactured home estates accounted or 2.1 per cent of the population. Residents were younger, with an average age of 67. Entry costs were lower than in retirement villages, but ongoing costs can be higher. Data source: See Productivity Commission 2015, Housing Decisions of Older Australians , figure 4.1.

Older home owners prefer to age in place and keep their home as a safety net

  • This figure depicts survey respondents’ views about how they see their current family home in terms of its role in their retirement, based on the Commission’s 2015 survey of people aged 60 years and over. It shows the proportion of respondents who indicated that they agreed or strongly agreed with each of four statements. Around three quarters of respondents indicated that they saw their current home as the place they would like to see out their retirement. About two-thirds said they saw it as a safety net that could help them deal with future adverse financial events. Around 40 per cent are keeping hold of their home to pass it onto their children and the same amount saw their home as something they could potentially use to fund their retirement. Data source: See Productivity Commission 2015, Housing Decisions of Older Australians , figure 11.

Housing as a store of wealth

As well as being a place to live, housing also acts as an investment good for the vast majority of Australians who own their own home, acting as a store of wealth built up over a lifetime.

About 80 per cent of older Australians are home owners, many of whom have benefited from strong house price growth and thus have increasing wealth even while incomes are low and there is substantial dependence on the Age Pension. In fact, older Australians are more likely to cut expenditure than draw down their assets in retirement. This means there is scope for older Australians to increase their incomes, and therefore standard of living, by drawing on their home equity through equity release products (such as reverse mortgages) or downsizing. The Commission's analysis showed that most retirees could modestly and safely increase incomes this way.

However, the Commission's survey showed that older Australians are reluctant to draw on their home equity and typically leave it as a last resort. This 'precautionary saving' is used to cope with uncertain costs that may arise in the future, such as medical expenses. While it is not irrational for older Australians to seek financial security, it can affect their wellbeing if living standards are lower than necessary and their decision to save is not based on quality information. A consequence of this can be unintended bequests: most older Australians seek to leave a bequest and in the absence of better information on options, the family home appears a logical choice. This contributes to low demand for home equity withdrawal products.

Reducing the distortionary treatment of owner-occupied housing

A contributing factor to the strong attachment of home owners to retaining their present home in old age can be the favourable treatment of owner-occupied housing in the tax and transfer system throughout peoples' working life and on into retirement. Exemption from capital gains tax encourages over-investment; heavy stamp duties can reduce the incentive to move; and exemption of the family home from the Age Pension means test creates an incentive not to trigger a review of pension entitlement by 'cashing in' some equity. The Commission's analysis showed that setting a cap on the means test exemption can reduce this distortion. Estimates are made of the consequent reductions in pension access, which may surprise some commentators. The means tests for residential and home aged care could also be improved - incorporating assets to a greater extent would better align the tests with people's capacity to pay.

Housing Decisions of Older Australians

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