Australia has it wrong when it comes to housing policy for an ageing society, a new report has found.

The problem stems from a presumption that older Australians are "rattling around" in houses that are too big for them and that downsizing is the only option, it says.

Per Capita, a thinktank, has published a new paper called The Head, the Heart and the House, arguing that Australia's housing policy has not kept pace with improved life expectancy and the latest in psychology research.

It says many people do not want to leave their homes when they reach a certain age and housing policy needs to reflect that.

Policies directed towards funding retirees in Australia – particularly superannuation and the age pension – are modelled around home ownership and do not adequately accommodate those who do not own their homes outright, or those who rent, it argues.

It says policy needs to reflect that good housing provides the basis for health and quality of life.

"In a kind of rational policy nirvana older Australian might all downsize and 'free up' housing for younger generations," the report's author, Emily Millane, said.

"However the reality is that many people, particularly older cohorts now, will choose to age in their current homes for a variety of reasons.

"We therefore need a policy mix that adapts the current housing stock to longer lives while also developing new housing, particularly for the vulnerable aged who are facing a housing shortage."

Recent data shows older Australians are increasingly choosing to live in outer metropolitan areas, with the number of people aged 65 in Australia's outer suburbs quadrupling between 1971 and 1991, and then doubling again by 2011.

While home ownership is high among present-day over 65s, at 82 per cent, greater numbers of the future aged will be in mortgage debt or renting.

As a result, there will be more demand for affordable housing, including social housing, while increased longevity will create the need for lifelong-appropriate housing.

The paper recommends a government grant scheme that can be used to "retrofit" existing homes to adapt them to peoples' needs as they age, allowing people who do not want to "downsize" to continue to live in their own homes.

It also proposes that government bonds be used to finance the development of affordable renting housing stock for older Australians.

Wealthier Australians begin to contribute more to aged care in their own homes by using home equity, it recommends. It proposes using a Pension Loans Scheme to achieve this so people with wealth over a threshold level can make a greater contribution to their care by lifting their annual caps on aged care payments.

People working in aged care ought to have mandated higher training levels and better pay conditions, it says.

A review of the adequacy of Commonwealth Rent Assistance for the vulnerable aged is also needed, it says.