Federal government moves to free up housing supply by incentivising pensioners to downsize

The federal government is seeking to free up housing supply by encouraging pensioners to downsize their homes.

In legislation which will be tabled in parliament on Wednesday, the government will give pensioners a 24-month exemption on the asset test on home sale proceeds, lowering the deeming rate from 2.25 to 0.25 per cent per annum.

The deeming rate is used to determine pension amounts.

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Pensioners are currently exempt from the social security assets test for up to 12 months when they sell their home to purchase or build another home, although there is an extra 12-month exemption available in extenuating circumstances.

That additional 12-month period will still be available under the proposed legislation.

The government said the 24-month exemption will allow older Australians more time to build, rebuild, repair or renovate a new home before their pension is impacted.

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"We don't want people putting off downsizing to a more suitable home because they are concerned about the impact it could have on their payment rate and overall income," Social Services Minister Amanda Rishworth said.

"These changes will give pensioners more flexibility to find a suitable new home and it will hopefully free up larger housing stock for younger families who need it."

More than 8000 pensioners downsized their homes last year, and the government is hoping the proposed changes to the asset test exemption would see that number increase.