RDP 2006-08: A Survey of Housing Equity Withdrawal and Injection in Australia 4. How was Equity Withdrawn and Injected?

Aggregate data on housing equity withdrawal provide little insight into how households withdraw and inject equity, and how widespread such activities are. This section provides results from the survey on these questions.

According to the survey, 42 per cent of households changed their housing equity over 2004; 12 per cent of households made a net withdrawal of equity over 2004, while 30 per cent made a net injection (Table 1). The remaining households neither withdrew nor injected equity, largely because they did not own any property, or owned their property outright.

Table 1: How Equity was Withdrawn and Injected
  Share of all households
(per cent)
Median value ($) Mean value ($)
Non-transactors in property
Withdrawal of equity by increasing debt 7.3 −20,000 −36,700
Injection of equity by:
Paying down debt 19.0 9,000 19,500
Renovating 6.5 14,000 31,800
Property transactors
Withdrawing equity 4.4 −82,700 −159,100
Injecting equity 4.6 55,100 122,200

By number, the bulk of households changing housing equity were non-transactors – 33 per cent of households versus 9 per cent that were property transactors. Around 7¼ per cent of households made a net equity withdrawal by increasing debt on their existing property; for these households, the median increase in debt over the year was $20,000, while the mean was considerably larger. A much larger number of households injected equity into their existing property, with 19 per cent of all households injecting equity through scheduled and additional payments on their housing loans, and a further 6½ per cent injecting equity through renovations. The median value of injections by non-transactors was considerably smaller than the median withdrawal made by non-transactors.

The finding that 9 per cent of households were involved in at least one property transaction in 2004 is broadly consistent with the available housing turnover data. These households were almost equally split between those withdrawing and injecting equity. However, the median change in equity resulting from these transactions was considerably larger than for non-transactors, such that property transactions contributed the bulk of the value of gross injections and withdrawals.

4.1 Withdrawals

Almost three-quarters of the value of all (net) withdrawals by households that were net withdrawers over 2004 were accounted for by those that engaged in property transactions (Table 2). Of the net withdrawals by property transactors, around three-quarters of the value was accounted for by the 2.7 per cent of households that sold more properties than they bought. This large contribution in part reflects the larger median withdrawal by such households – $125,900 versus $33,500 for withdrawals based on other combinations of property transactions. These other property transactions were fewer in number and smaller in value, but nonetheless remained significant as a share of overall withdrawn equity – accounting for almost one-fifth of the total value withdrawn.

Table 2: Housing Equity Withdrawal by Method
  Share of all households (per cent) Median value ($) Share of value withdrawn (per cent)
Non-transactors in property 7.3 20,000 27.9
Refinancing and new loans 4.5 28,000 20.3
Redraw facilities 1.4 11,000 3.0
Revolving credit 0.7 20,000 3.4
Withdrawal from offset account 0.3 8,000 0.6
Cannot say/other 0.5 6,000 0.6
Property transactors 4.4 82,700 72.1
Sold more properties than bought 2.7 125,900 54.1
Bought more properties than sold 0.9 18,300 10.7
Bought and sold equal number of properties 0.8 54,000 7.4
Downsized 0.4 53,600 4.3
Upsized 0.3 82,700 3.0

Notes: Components may not sum due to rounding. The ‘sold more properties than bought’ category includes households that sold a property they inherited, and households that received a bequest funded by the sale of a deceased estate.

Sales of owner-occupied property – which include last-time sales of elderly households' properties – appear to be associated with larger net equity withdrawals than sales of investment property. This is consistent with the finding that for those that sold more properties than they bought, the median LVR of owner-occupied properties sold was slightly lower than it was for investment properties (Table 3); this is not surprising given the tax advantages of interest deductibility for investment properties.[5] This is despite the fact that the typical investment property had been held for slightly longer than the typical owner-occupied property, allowing more time to accumulate capital gains and pay down debt. Owner-occupied properties also tended to sell for more than investment properties and second homes, consistent with investment property being generally more concentrated in cheaper housing stock such as units (see Appendix D).

Table 3: Sales by Withdrawers that Sold More Properties than they Bought
Variable Units Owner-occupied
property
Investment
property
Second
home/land
Share Per cent 36.6 29.1 34.3
Median sale price $ 274,000 258,000 160,000
Median time held Years 5 6 6
Median debt at sale $ 110,000 104,000
Median LVR at sale Ratio 0.50 0.58

Notes: Debt and LVR are only for properties that had debt outstanding at the time of sale. Medians are not reported where sample size is very small.

Of the households that sold more properties than they bought, 36.6 per cent sold their main residence. Of these households, around 40 per cent moved into rental accommodation; most of the rest moved into a property which they already owned. A small number of these transactions appeared to reflect just one leg of a transaction, with households either moving into a property that had been purchased in 2003 or planning to purchase a property in 2005.

Investors selling more properties than they bought appear to have typically been experienced property investors, with a median holding period of six years for the properties that they sold. Despite the sales, these households finished the year with an average of 2½ properties.

Of the non-transacting households that withdrew equity, by far the most common methods were to refinance an existing loan and increase the outstanding balance or to take out a new loan. Two other common methods were drawing upon previous excess principal payments or drawing on a revolving or home-equity type facility. Around 20 per cent of non-transactor households that withdrew equity also undertook renovations. The methods these renovating households employed to increase their debt were in similar proportions to the overall group, though the median amount these households withdrew was slightly larger at $22,500.

4.2 Injections

In contrast to the results for households withdrawing equity, for households that made a net equity injection over 2004, the value of injections was split fairly equally between non-transactors and transactors. This reflected a large number of non-transacting households making small injections by paying down debt or renovating, balanced by a small number of households making large injections through property transactions (Table 4).

Table 4: Housing Equity Injection by Method
  Share of all households (per cent) Median value ($) Share of value injected (per cent)
Non-transactors in property 25.5 10,000 50.7
Reducing debt on existing property 19.0 9,000 32.5
Scheduled repayments of principal 9.6 7,000 10.4
Regular repayments greater than minimum required 6.7 10,000 10.6
Irregular lump-sum payments 2.1 21,400 8.4
Refinanced loan 0.3 12,000 1.7
Cannot say/other 0.2 1.3
Renovations 6.5 14,000 18.3
Property transactions 4.6 55,100 49.3
Sold more properties than bought 0.4 52,400 2.0
Bought more properties than sold 3.6 58,800 41.0
Bought and sold equal number of properties 0.6 35,600 6.2
Downsized 0.0 0.4
Upsized 0.6 35,600 5.8
Notes: Components may not sum due to rounding. The ‘sold more properties than bought’ category includes households that sold a property they inherited, and households that received a bequest funded by the sale of a deceased estate. Medians are not reported where sample size is very small.

Within the 19 per cent of households that injected equity by reducing debt on their existing property, 9.6 per cent reported that they simply made the regular scheduled repayments, while an additional 6.7 per cent made regular repayments above those required by their lender. A further 2.1 per cent indicated that they made irregular lump-sum repayments. These one-off lump-sum payments tended to be relatively large, so that they accounted for a disproportionately high share of the total equity injected.

Around 6½ per cent of households injected equity over 2004 through renovations, financed, at least partly, from their own savings. In total, this amounted to around 18 per cent of the total amount of equity injected by households that made a net injection over 2004.

Within the 4.6 per cent of households that injected equity and undertook a property transaction, most purchased more properties than they sold, accounting for the bulk of equity injected by property transactors. Over half of the properties purchased by this sub-group were owner-occupied homes (Table 5), with around 40 per cent of these purchased by first-home buyers. The owner-occupier purchases tended to be associated with more expensive properties and lower debt levels compared to those for other properties. These results are consistent with investors' preferences for relatively cheaper property and higher gearing mentioned in Section 4.1. It is worth noting that the LVRs on the purchased properties were significantly higher than the overall LVR of households undertaking these transactions (that is, these households often had other, less indebted, property holdings).[6]

Table 5: Purchases by Injectors that Bought More Properties than they Sold
Variable Units Owner-occupied
property
Investment
property
Second
home/land
Share Per cent 57.5 26.6 15.9
Median purchase price $ 260,000 235,000 160,000
Median debt at purchase $ 210,000 233,000 200,000
Median LVR at purchase Ratio 0.84 0.99 0.97
Note: Debt and LVR are only for properties that had debt outstanding at the time of purchase.

A comparison of the results regarding the methods of housing equity withdrawal and injection underscores the importance of transactions to overall flows of housing equity withdrawal. In particular, for the sub-groups of property transactors most important for overall housing equity flows, sellers typically withdrew more equity than buyers injected, partly reflecting much higher debt levels among buyers. This is consistent with the influences of life-cycle factors and house price gains discussed in Section 2 and further explored in Section 5. It also follows that shifts in the level of aggregate transaction activity will likely be associated with changes in the value of aggregate housing equity withdrawal, as canvassed in Section 7.

Footnotes

Valuations were provided by the household. However, we believe that our analysis is unlikely to be biased by subjective valuations for the same reasons described in Ellis, Lawson and Roberts-Thomson (2003). In addition, it may be that households' perceptions of their financial position are more relevant to our analysis than is their actual position. [5]

These LVRs are also higher than previous estimates (Coleman et al 2005). [6]