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Exemptions to caps on super may be the way to better housing affordability
• Downsizers are likely to be incentivised to sell the family home in the budget
• This is likely to assist self-funded retirees
• A significant portion of Baby Boomers wealth is tied up in the family home
• Government goal is to free up more supply of quality property
There is speculation leading into the upcoming budget that the Government is considering incentives to encourage downsizers to sell the family home. Their hope is that this will free up property stock, especially in some of the more tightly held locations within Melbourne and Sydney. Ultimately the goal is to increase the supply side of the property equation to reduce price growth, particularly in well-established suburbs.
The belief is that more Baby Boomers are keen to sell their homes to minimise upkeep after downsizing, but choose not to due to current arrangements –
• recent limits placed on Superannuation
• changes to the way the pension assets test is calculated.
Currently, a downsizing retiree’s surplus cash from the sale of the family home will negatively impact pension eligibility. Whereas, holding onto the home means the wealth tied up in the home is exempt from the pension asset test. Similarly, the recent $1.6million tax free limit on super funds and $100,000 limit on non-concessional contributions also provides a disincentive or road block for retirees to downsize and top up their super.
It is increasingly likely that under the proposed budget, retirees who are selling a family home will be given exemptions from the $1.6M cap and non-concessional contributions restriction. This will allow retirees to downsize their home and top up their super with the extra cash. However, this proposal does not appear to address the effect a sale would have on pension entitlements from the increased level of super, which also has a negative impact on the assets test for the Pension. This means a downsizer receiving a Pension payment will be negatively affected if they either keep the cash or store it in super. Therefore, this is likely to benefit only self-funded retirees.
I suspect that if this proposed change is legislated, it will provide a window of opportunity for self-funded retirees with wealth tied up in the family home to take advantage of downsizing before the loop hole is closed down after backlash that it benefits ‘only’ wealthy retirees.
From a housing affordability perspective, this approach has the potential to free up more of the tightly held properties in superior locations. The value and types of properties held by Baby Boomers are likely to be of greater value than any other demographic. If successful, this should achieve a greater supply of middle to higher end property for sale. In turn, an increase in supply has the ability to reduce the rate at which property values are growing. The additional supply of higher end property will have a flow-on effect to reduce value growth at lower level property values, which are ultimately dragged up in value by higher priced property and locations.
Some questions this potential new legislation poses are –
• Will the downsizers be able to purchase a property in their area of choice that meets their lifestyle needs at a sufficiently reduced price that also provides for a financial windfall to fund retirement?
• How impactful will this be given much of the cash from the sale will simply be re-invested back into property?
• What opportunities would this offer the property investor?
When politicians start talking about property, people and economies become apprehensive and rightly so. Politicians often have only a short-term plan – to be re-elected; whereas, as families and individuals we must have a long-term Property Plan.
There are always many layers to consider when it comes to your Property Planning…….and the governments!
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