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Older Australians should be encouraged to downsize their homes with a few simple tax changes to help meet the looming demand for detached houses by younger families, experts say. 
A new report from academics Bob Birrell and David McCloskey warned on Monday that Australia will experience a dramatic increase in demand for detached houses in coming years - mostly from young families - which authorities have failed to plan for.
The report, published by the Australian Population Research Institute, found huge demographic changes taking place between 2012 and 2022, coupled with the housing needs of young families and preferences of older Australians to remain in their homes, will see a shortfall of around 28,500 detached houses in Sydney and 19,000 in Melbourne by 2022.
It says authorities have severely underestimated the housing needs of young families, not realising that young families require larger spaces than typical inner-city apartments. 
It says younger households will confront an "unprecedented squeeze" in the housing markets of both cities because their increasing numbers will butt up against huge growth in the number of older households due to population ageing.
The report says the supply of detached houses would be improved if greater numbers of older Australians downsized their homes.
But it says the prospects for downsizing are "poor" because they prefer to live in homes they have lived in for a long time, and because the financial incentives are not there.
"The Coalition government added a potent financial incentive to avoid downsizing in its 2015 budget," the report says. 
"From 2017, the rate at which the pension reduces for assets above the asset tax threshold will increase from $1.50 a fortnight to $3 a fortnight.
"Households downsizing and thus having to report increased assets, as with bank deposits that have been augmented by the difference between the price of the family detached home and the down-sized unit or apartment, will find their pension payment reduced significantly."
Simon Cowan, from the Centre for Independent Studies, says including the family home in the pension assets test would be a good way to encourage older Australians to downsize.
"At the moment, you have a disincentive to downsize because it can lead to a reduction in pension income and, when you add in the cost of stamp duty and the cost of moving, the amount of capital you release from downsizing is not that high."
Grattan Institute director John Daley said another way to encourage downsizing would be to significantly reduce or abolish stamp duties, and replace them with property levies instead.
"That way you would be charged more for living in a house and less for selling it," Mr Daley said.
"At the moment we've got the incentives in completely the wrong direction. You're paying the stamp duty when you sell the house [and buy another one], but you don't pay much for living in it. We need to flip that around so you don't pay a penalty for [moving] house but you do pay extra for living in something bigger than you really need."
Clarification: An earlier version of this article was amended to make clear stamp duty is payable on the purchase of a house or apartment, not on the sale.
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