The recommendations could provide a path for the federal government to gradually change the living and spending habits of millions of older Australians to reduce their reliance on state subsidies, free up housing and make the retirement system more financially sustainable.

The report helps build the case for preliminary proposals being considered by Treasurer Scott Morrison that would allow retirees to sell their homes and switch to smaller properties without reducing their government pensions.

Unlocking equity soon critical

Many economists believe that unlocking property equity may become a critical part of fixing Australia entrenched budget deficit by reducing the financial burden of Australia's aging population on current and future taxpayers.

"The biggest impediment to them doing that is their own attitude," commissioner Karen Chester told The Australian Financial Review.

"They're over [providing] by holding onto the family home. It's quite sad and perverse that among some very low-income Australians the precautionary savings motive is making them net savers in retirement.

"Older Australians would rather reduce their own consumption and standard of living than view the family home as something they could use to improve their wellbeing."


Only 1 to 2 per cent of older homeowners use so-called equity release products – often dubbed reverse mortgages – to access the wealth contained in their homes. This is 0.4 per cent of the $926 billion in home equity owned by people above 65 years.

By comparison, older people hold just $339 billion in superannuation accounts and currently taxpayers about $43 billion a year in aged pension payments – about one tenth of the budget.

The Productivity Commission report, Housing Decisions of Older Australians, includes a survey of 1500 people aged 60 plus, and highlights the shift towards people staying in their homes for longer, even if those homes are larger than needed.

It slams state government red tape and planning rules for reducing the availability of smaller homes for "downsizers".

Fear of running out of money and misunderstandings about the cost of residential care has resulted in many pensioners scrimping during retirement. A strong aversion to debt in old age is another reason, Ms Chester said.

"This precautionary saving is driven by uncertainty around longevity, health and residential aged care needs, and is a potentially expensive form of self-insurance that can lower living standards in old age," she said.

Yet the commission found that the average cost of a refundable residential aged care deposit – about $330,000 – is far below the median family home, which five years ago was $440,000.

"There's a material gap between the value of the family home and what's required to fund aged care," Ms Chester said.


"Our sense is that if older Australians had a better understanding of the likelihood of going into aged care, and what the costs would be – plus a signal from government that the home is not just a form of wealth – they might change their attitudes and preferences, and start to draw down on their equity."

Ms Chester said the biggest impediment to downsizing was the lack of affordable smaller housing and state governments were largely to blame.

While encouraging older Australians to change their attitudes was a federal responsibility, "if the state governments don't come to the party, trying to encourage people to downsize won't work," she said

The study was initiated by the commission and is the third in a series of research papers looking at the aging population.