While capital gains tax gets attention, we have a housing movement problem

Australia's housing crisis is real. Demand is exceeding supply.

Estimates suggest a shortfall of around 40,000 to 60,000 dwellings per year relative to underlying demand. Increasing construction is essential. However, building new homes is not the only lever.

There is also a structural inefficiency within the existing housing system: housing is not moving efficiently between households.

Australia already has significant unused capacity within its housing stock.

There are an estimated 13 million spare bedrooms nationally, with a large proportion concentrated in homes owned by older Australians.

This is not a marginal group:

•             Around 75-80% of Australians aged 65+ own their home;

•             Many live in three- or four-bedroom houses; and

•             Many have low superannuation balances relative to housing equity.

This creates a large cohort of asset-rich, income-constrained retirees occupying housing that no longer matches their needs.

At the same time:

•             families are constrained in smaller homes;

•             first-home buyers struggle to enter the market; and

•             rental pressure remains elevated.

This is not just a supply problem but also a distribution and mobility problem.

The natural mechanism to rebalance this is downsizing and this is not occurring at scale.

Only around 15,000 to 16,000 Australians per year use the downsizer contribution scheme - a very small share of overall housing turnover.

This reflects the incentives embedded in the system and for many retirees, downsizing is not financially attractive.

First, the $300,000 downsizer contribution cap is often too small to materially improve retirement outcomes for those with limited super.

Second, stamp duty creates a significant upfront cost at the point of moving and critically, this cost is often avoidable.

Many older Australians will ultimately exit their home via aged care or deceased estate.

In these cases, there is no discretionary stamp duty event triggered by the homeowner.

In contrast, choosing to downsize voluntarily can result in a substantial tax cost. In effect, the system can penalise proactive movement.

Third, releasing housing equity can reduce Age Pension entitlements, linking downsizing directly to a potential reduction in income.

Taken together, retirees are being asked to:

1.           Move home;

2.           Incur transaction costs; and

3.           Potentially reduce their income.

In return for better housing suitability and this is not a compelling economic trade-off for people.

If policy makers want to increase housing mobility, the objective should be clear:

Downsizing must leave individuals financially better off - or at least no worse off - while improving their lifestyle.

Three targeted reforms could achieve this.

Downsizer contribution

First, redesign the downsizer contribution to improve targeting and impact. Rather than a flat cap of up to $300,000, contribution limits could be linked to total superannuation balances:

•             Under $500,000 → up to $1,000,000 contribution;

•             $500,000 to $1,000,000 → up to $600,000;

•             $1,000,000 to $1,700,000 → up to $300,000; and

•             Above $1,700,000 → no eligibility.

This approach better targets those with low retirement savings but high housing equity.

Stamp duty

Second, reduce or remove stamp duty for genuine downsizing transactions.

Lowering transaction costs would remove a key barrier and correct the current asymmetry where voluntary movement is penalised relative to staying.

Age Pension

Third, introduce a temporary exemption from the Age Pension assets test. A time-limited exemption for example, five years - would remove the immediate income penalty associated with releasing housing equity.

The benefit of these reforms is not just individual.

It is systemic as housing operates through chain effects. When one household moves, it creates opportunities for others: A retiree downsizes → a larger home becomes available → a family upgrades → a first-home buyer enters the market → a rental property is freed up.

One transaction can unlock multiple housing outcomes.

Modelling suggests that even a modest increase in downsizing could generate around 30,000 additional housing transactions per year.

Through these chain effects, this could enable 10,000 to 15,000 households to access more appropriate housing, benefiting 25,000 to 35,000 Australians annually.

This would not eliminate the housing shortfall.

But it could meaningfully reduce pressure from the 40,000 to 60,000 dwelling gap, particularly in the near term while new supply is delivered.

Housing policy is often framed as a construction challenge.

But part of the problem is a movement problem.

Right now, policy settings encourage people to stay - even when moving would improve both their lifestyle and the efficiency of the housing system.

Australia does not just need more homes. It needs to make better use of the homes it already has.