If you’re approaching retirement (or already in the midst of it) and your children have flown the coop, you might be rattling around in a too-big house and cursing the amount of time you spend cleaning and maintaining it, inside and out.

If this sounds familiar, the idea of downsizing – selling the family home and purchasing a usually cheaper, smaller and more manageable, property – may have crossed your mind. And with super funds taking a hit due to the impact of COVID-19 (coronavirus) on share markets, the idea of re-feathering your retirement nest with some of the equity you’ve built up in your property may be equally attractive.

Video transcript

DIANA: Welcome to the ‘Q&AMP: Understanding retirement’ series, I’m Diana Mousina, a senior economist at AMP Capital.

As the effects of COVID-19 continue, we realise you may have some questions about your retirement and savings. My colleagues and I are here to answer some of those questions.

Today I’ll be talking with financial adviser John Dani about downsizing your home and whether now is a good time to do this, given the current state of the residential property market.

In this video, AMP Capital senior economist Diana Mousina and private client adviser at AMP Advice John Dani, discuss some things to consider,including the current state of the property market, reasons for downsizing, and possible financial implications. Being informed can help you work out if it's a good next move and if now may be the right time.

JOHN: Yeah and it's good to be here, Diana and you're right, property markets have certainly been affected by the coronavirus just like other areas of the economy. I'd be really interested in your view on the outlook of property values as you see it.

DIANA: Thanks, John. As you know, the coronavirus has had a really far-reaching effect on the economy, including shutting down of production, loss of income for many businesses and employees, and rising unemployment.

As a result, we’re expecting that property prices will fall by about 5 to 10 % over the next 6 to 12 months and it could be higher than that, if the unemployment rate reaches above 10 %.

Having said that, in the near term what we're seeing is that there are much fewer properties coming onto the market so the ones that do come onto the market seem to have higher demand for them.

So John, could now actually be a good time for people to sell their homes and downsize?

JOHN: Understanding trends in property values can be really useful, but no one should be making a decision to downsize based purely on possible future trends in the property markets.

Trying to time the market runs the risk of, for example, having to rent for an indefinite period of time waiting for the right property to crop up in the right area, at the right price, at some possible point in the future – and that can cost a lot of money.

And downsizing is a significant financial and, for many people, an emotional decision that needs to be entered into really carefully.

DIANA: That's a good point, John. So, what are the main reasons that you’ve found for people to downsize their home?

JOHN: Downsizing can be a really effective way to free up some extra money, particularly in retirement. And let's face it, many retirees have seen their retirement savings battered by the downturn in the sharemarket and despite signs of a gradual recovery, many retirees may look at downsizing as a way to boost their available savings in retirement.

The other reason people go into downsizing is for lifestyle reasons. Many people want to live in a different area, they want to be closer to family, or quite frankly, they just want to have a smaller place, or a lower maintenance place in their retirement.

DIANA: So if someone wants to go ahead with downsizing, what do you think are some of the key factors they should consider?

JOHN: There are three main factors. It relates to hidden costs, it relates to age pension and it's also about having a clear plan for the money.

There are many hidden costs associated with buying, selling and moving home. These include: legal fees, real estate agent fees, stamp duty, removalist costs and even storage costs, if you need to store your belongings temporarily.

If you’re on the age pension, you'll need to realise the money that you've gained from downsizing will count towards your means test. And therefore, it could result in a reduction, or even the cancellation, of your age pension. So it's critical to understand the impact of downsizing on your government entitlements.

And last of all, it's crucial to have a clear plan, understanding what to do with the money you've received from downsizing. Are you going to pay off debt? Are you going to contribute into super? Are you going to spend the money on some lifestyle assets?

What we find is that, unless you have a clear plan with the money you're going to gain from downsizing, it's all too easy to spend it frivolously on non-essential expenses.

DIANA: You mention contributing into super. How does that work?

JOHN: The ability to make downsizer contributions is actually relatively recent. If you’re aged over 65 and you’ve lived in your family home for 10 years or more, you can contribute up to $300,000 individually, or $600,000 as a couple, from the sale of your home into superannuation.

Now, this can really help to boost the income that you can generate in retirement. It's important to realise there are other eligibility criteria that need to be met, so it’s really important to check these before you make any decisions.

DIANA: Thanks, John, some great insights. Let's do a quick recap of the key points:

  • As a result of the current health crisis and rising unemployment rate, we’re expecting that residential property prices will fall by about 5 to 10 % over the next 6 to 12 months.
  • Apart from the outlook on residential property prices, people also need to consider their lifestyle and financial goals when making the decision to downsize.
  • If you’re planning to downsize, it's best to have a clear plan of how you're going to use the extra money and seek advice if you’re unsure.

As you can see, downsizing in, or leading up to, retirement isn’t always straightforward. Between moving costs, potential impacts on age pension entitlements and the option to top up your super, having a clear downsizing plan could help you better achieve the outcomes you’re aiming for. If possible, speak to your financial adviser about the best options for your circumstances. If you don’t have a financial adviser, you can contact us on 131 267 or find an adviser online.

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Important information

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