There are two reasons for someone, typically an older home owner, to downsize.
The current dwelling is too big. A majority of older Australians live in detached suburban dwellings of three or more bedrooms which are often regarded by policy-makers as under-utilised. Much urban policy is premised on the assumption that an ageing population will require more diverse (implying smaller) housing stock into which older people will (or should) downsize.
To release equity. Selling a dwelling and purchasing a less expensive dwelling to free up (liquidate) a proportion of the equity held in the original dwelling.