The 4 times downsizing fails
Before we get into the times downsizing works, let’s go through the times when downsizing fails:
#1 – Buying and selling costs more than you think.
It costs money to sell a house. You need to pay for real estate agents, lawyers, repairs, and marketing. It all chips away.
What looks like a potential $1 million “profit” might end up being tens of thousands less after these costs.
For instance, at Opes we often say that it costs about 5% of your home’s value to sell it.
Let’s say you have a $1 million house with a $200k mortgage. By the time you sell it, and pay all the costs, you might have $750k left.
If it costs you $600k to buy a new house, you’ve got $150,000 left. Not bad. But, also not huge.
Only about 1 in 10 older sellers are left with more than $200k once all the costs were covered, research suggests.
#2 – You downsize in space, but not in price
A common trap Kiwis fall into is buying a smaller house ... but one with a high price.
That’s because as you age, you typically want a house that is “easier care”. That typically means buying a newer property.
And newer properties tend to cost a bit more. Because, they aren’t as worn out.
One couple I know lived in a posh suburb in Auckland. They wanted to sell their $1.8 million family home and buy a newer smaller house. The trouble is that all of those homes in their area also cost $1.8 million.
Sometimes retirees will sell a $1 million house and move into a $1 million apartment. So you might not come out with much left over money.
A New Zealand study found that for many older homeowners, who sold and bought again, they had little money left over. Some even spent more.
#3 – There aren’t always “downsizer-friendly” houses available for sale
There aren’t that many genuinely downsizer-friendly homes available.
The Retirement Commission has flagged the housing stock simply isn’t built for older people. That's why many struggle to downsize.
Over the 10 years to 2023, one-bedroom homes made up less than 10% of New Builds.
During that same period, one-person households increased by 120,000. But the supply of one-bedroom homes rose by only 40,000.
So even if you want to downsize, the right homes may not exist where you want to live.
#4 – If you don’t do it quickly, you might never move
Moving isn’t just a financial decision; it’s emotional and logistical.
You’ll likely have memories in your family home.
And if you’ve been there for years, you’re comfortable. So there needs to be a good enough house for you to move into (that makes it worth it).
As people age, their willingness (and ability) to move goes down. By the time you’re in your 70s, most homeowners tend to stay put unless forced.
Research shows that even though homeowners intend to downsize “someday,” ... they usually don't until something forces the move. That's events like illness, or financial hardship .... not careful financial planning.
What happens if you rely on downsizing to pay for your retirement, but you never move? You typically won’t be able to spend as much as you planned to.
That could mean less travel or comfort, compared to what you thought you would have.
That’s not to say that downsizing never works. Now let’s talk about the times it can work well.
