Older Australians in retirement often find themselves asset rich yet cash poor. This is a widespread problem with a seemingly obvious solution: sell off the family home, buy something smaller and live off what’s left.
Yet the large majority of older Australians are choosing to stay put.
Despite government efforts to provide significant incentives for potential downsizers, the preference among retirees is to continue living in their big houses.
Research suggests the amount of time people spend looking after grandchildren has increased over the past few years. Photo: Glenn Hunt
Are retirees acting irrationally? Recent work in the economics of the elderly has a lot of say about this trend in both Sydney and Melbourne, or in Australia in general. The body of research essentially says that in terms of choosing to keep their big homes, the retired elderly are acting wisely and rationally.
I’ll explain why. First let’s note this trend is not unique to Australia. A significant proportion of the elderly population in advanced economies, including Canada, France, Germany and the United States, keep a substantial portion of their assets until late in life.
On average, the financial wealth of households (in various forms) in these economies has been shown to increase until age 70 and then stay almost constant after that. The family home is often the largest and most visible asset that elderly people hold on to in their twilight years.
In Australia, the biggest hurdle by far is the high transaction costs when downsizing. Stamp duties for new residences, agent’s fees and moving costs are among the key ones that worry empty nesters. And while many are confident that they can sell their family homes at a good price, and have a lot of cash left after they purchase a smaller new home, the current rules on means-testing mean they risk losing their age pension if they have significant money left over.
In May this year, the budget had a proposal to allow retirees who downsize to contribute the excess money into superannuation, which would provide tax advantages. Three months on, nothing has changed and the uncertainty is a significant disincentive for retirees to downsize.
But discussion of the transaction costs and age pension assets test ignores another economic reason why retirees stay put: the increased utility people get from their homes after retirement. In fact, economic research points to time, or time use, as the main explanatory element. The amount of time on their hands is, of course, the main distinguishing factor between those who still work and those who are retired.
For recent retirees, non-market time is suddenly in abundance, and this necessarily alters how they allocate their hours in the day. It’s been a few years since the last Australian Time Use Survey, but the most recent figures suggest people aged 65-74 spend more time cooking, cleaning, doing the laundry, sewing and gardening than those aged 55-64. This coincides with retirement.
The survey further suggests that time spent in household activities increases until the mid 70s and then decreases only slightly, perhaps due to a deterioration in health. Time spent looking after grandchildren has also increased over the past few years.
Clearly, retirees produce more goods at home after retirement. For example, time-poor working parents would be more likely to contract a garden service to do the lawn mowing because of the high opportunity cost of doing the chore themselves – either in wages (if they have to take time off work for it) or precious time spent with the kids or other family. But with retirement, the opportunity cost of time decreases, so doing chores rather than outsourcing them becomes more appealing.
What does this have to do with housing, and with big houses in general?
In economics terms, it comes down to something called the “time-use adjusted theory of life cycle consumption”. This asserts that time used for home production is highly associated with the house someone occupies. This is because the house serves as an infrastructure base in which home production can occur.
For retirees, the more time one has, the greater amount of home production is done and therefore the greater the need for a house. Since most retirees are empty nesters whose sizeable homes were once filled with at least two children, the family home is the ideal base to support their renewed focus on home production.
The more home production that is done inside a home, the greater the consumption value or utility of the home. This relationship is self-reinforcing. On food production, for instance, newly retired Australians who find new food recipes can use their kitchens more intensively. With new dishes to offer, they can invite more family and friends for home-cooked dinners far more often than when they were working.
If retirees were keen gardeners, they are more likely to spend more time tending their gardens and keeping the grass low and their plants blooming, which also makes it a good showpiece for visiting family and friends. With clean homes, pretty gardens and good home-cooked food, there is more incentive to stay home rather than eat out. Further, a well-cared, spacious home is an ideal place to care for grandchildren.
More generally, the family home is a place where retirees can welcome back and comfortably accommodate their children’s families once in a while.
How that affects the time of older Australians can mean the difference between staying put or downsizing. This is, of course, directly related to energy levels and how they enjoy spending their time. That’s a question for individuals, but economists would say that the bulk of retirees aged between 65 and 75 who choose to stay put are perfectly rational in choosing to do so.
Dr Rebecca Valenzuela is a senior lecturer in the Department of Economics at Monash University.