It’s great being able to boost retirement savings but make sure the numbers stack up, writes Duncan Hughes in the Australian Financial Review 13-14 May 2017
Note: Appreciate this is an Australian article, however the same principles apply to NZ
Christopher and Fiona Marsh plan to make the most of their grown children, huge property gains and new tax breaks to downsize from their sprawling suburban home in Melbourne's leafy Surrey Hills to a luxury apartment in a gritty inner-city suburb.
But for many empty nesters, leaving their family home is a leap into the unknown with financial and social consequences that could take big bites out of retirement savings and create income problems, such as how to generate enough return from any windfall to compensate loss of age pension benefits.
"Our experience is that downsizers end up with less cash than expected out of moving home," says Richard Wakelin, director of Wakelin Property Advisory and a buyer's agent for more than 30 years.
The Marsh family will be able to put a combined $600,000 into their super under the new rules.
They are waiting for their youngest son, Lachlan, 16, to finish school before moving into the three-bedroom Collingwood apartment that they bought off-the-plan, which means they also avoid paying state-based stamp duty on the deal, a saving of more than $110,000.
Marsh, a builder and businessman, bought his first house in Guildford Street, Surrey Hills, which is about 1111 kilometres east of Melbourne's central business district, in the early 1990s for about $200,000 and sold it 25 years later for $2.2 million. He then purchased and renovated the bigger house next door which he reckons will sell for more than $4 million.
"It has been almost seamless," Marsh says about the planned move. "It also means I do not have to go through three years of planning regulations and building to renovate another house."
Marsh, who also has a 20-year old daughter, Georgia, studying in Canberra, looks forward to the vibrant street life of Collingwood, about 3 kilometres north-east of Melbourne.
John Crane, a director of Cranecorp, a top-end apartment developer, says budget changes encouraging downsizers will help sustain a growing trend.
Downsizing is rarely a clear-cut decision, says Christopher Koren, a buyer's agent with Morrell and Koren.
Those downsizing from the inner suburbs into apartments closer to the central business district could end up spending a lot of the sale proceeds finding comparable quality in areas where value has sky-rocketed, particularly around Sydney and Melbourne. "The market is over-sold," Koren says. "Options are very limited."
More than 20 per cent, or upwards of $200,000, can be spent trading down from a $3 million to a $2 million house, shows conservative analysis of costs by Wakelin Property Advisory.
Those needing bridging finance for a more expensive property will pay 5.8 per cent on a bridging loan, which is more than $23,000 for four months and $70,500 for 12 months, according to analysis by finder.com. which monitors financial products.
Selling costs on a typical $3 million home include estate, advertising and conveyancing fees of more than $76,000, according to Wakelin analysis.
"Downsizers typically don't truly downsize," says Wakelin. "Sure, they might move to a house with fewer bedrooms, or swap a house for a townhouse or apartment. But they often move to an area closer to town, or choose a property with a very high level of renovation with all the mod cons."
They also often move to postcodes that have better public transport and are closer to healthcare and amenities.
"Despite trading down to a smaller property, downsizers discover that higher land costs, building improvements and bigger maintenance costs means the replacement dwelling isn't much cheaper," says Wakelin.
"Not everyone may benefit from selling down their home and placing the proceeds into super," warns Jonathan Philpot, a partner with HLB Mann Judd Wealth Management.