Moving to a smaller home after the children have flown the nest probably sounds a very sensible idea for many people. Not only will they be living somewhere cheaper and more manageable to run, but they are also likely to be able to release wealth that could help to fund their later years or be passed to younger family members trying to get on the housing ladder.

Indeed, retirees and those approaching retirement (55 plus) have a great deal of equity tied up in their homes. Our analysis suggests that in total, two-thirds of all the wealth tied up in owner occupied homes is held by this age group.

Market constraints

According to the Survey of English Housing, there has historically been a surprising level of resistance to moving among older people, despite the fact that half of over-55s have a bigger home than they need. Those in their retirement years account for just 6.5% of all homemovers each year but just under 30% of non homemovers.

Across the market as a whole, downsizing tends to be triggered by a life event that highlights the need for a smaller home. Until then, elderly people may be deeply resistant to leaving the family home or the neighbourhood, according to a 2009 report by the Centre for Housing Studies.

Potential financial benefits are not a key driver, the report found, partly because across much of the country there’s not a great deal to be gained in monetary terms, taking into account the costs and sheer hassle of moving.

Our research backs that up. For instance, downsizing from a typical three-bed to a two-bed property would release more than £100,000 of equity in only one tenth of UK locations. So for most people in the mainstream housing market, downsizing is a matter of need rather than choice.

Typically they move from a threebed to a one-bedroom home in order to maximise the amount of cash they can release. On average, such a move frees up around £123,000 (though it’s worth noting that still, in almost half of UK locations, the money released amounts to less than £100,000).

Affluent homeowners

However, it’s a rather different story for people who own larger properties and live in the more affluent parts of the country. For them, downsizing can unlock substantial sums. Thus, a move from a four- to a three-bedroom property would release £100,000+ of equity in almost 80% of UK locations.

Such homeowners are thinking about lifestyle and preferences when they decide to downsize; it’s often a question of convenience and a desire to be nearer the family and young grandchildren. Typically they’ll make the move in the run-up to retirement or immediately after, and they’ll keep a certain amount of space to accommodate family visitors.

A typical move might involve the sale of their four- or five-bedroom home and a move to a two- or threebedroom home. Importantly, the bigger the family home, the more equity a typical two-bedroom downsize releases. Thus, a move from a fourto a two-bed home frees up over £200,000 on average, with such sums being achieved most regularly in the South East. A move from a five- to a three-bed home would release much more – on average, over £450,000.

With average sums of this size involved it’s hardly surprising that downsizers are more commonplace in more affluent areas where owners stand to gain most.

Downsizers now drive 22% of prime London sales and 38% of those in the prime regional market.

Looking forward

Looking ahead, the trend towards downsizing is likely to gain momentum, as parents increasingly tap into their equity to help their children onto the housing ladder. Already, over the past five years, our figures show that first time buyers have received two or three times as much parental help with their deposit as they did before the financial crisis.

This trend is likely to be concentrated among wealthier families moving out of four-bedroom plus family homes, especially in the South East, as activity in the residential market picks up.

How far will the drive to give the next generation a leg up onto the ladder extend down through the mainstream market?

It’s interesting to compare the amount of cash released by a mainstream move from a three- to a two-bedroom property with the average deposit needed by a first time buyer. Although there is some regional variation, this comparison indicates such a move would release equity worth two to three times the size of the deposit needed. Even away from the upper end of the housing market, downsizing by parents could be a godsend for first time buyers that helps to fuel sales in the lower echelons.

This is likely to underpin an increase in downsizing. Our calculations indicate that around 55,000 homeowners currently downsize each year, releasing equity of around £7 billion. Over five years we believe this will increase to 90,000 households, releasing equity of around £14.6 billion.

We expect this release of equity to result in a further increase in the amount of parental assistance to first time buyers that has averaged around £3.5 billion a year post-credit crunch.

Taken from
Residential Property Focus Q1 2013

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