Property Prices Are Up So Why Are Sellers So Down?

House prices are significantly higher than pre-pandemic, creating significant equity gains for Australian homeowners.

Equity is a key requirement for home upgraders, and this is critical for first-time homebuyers to unlock homes to enter the market.

However, after booming in 2021, market activity has slowed significantly. With a lot of equity to play with, Why are sellers reluctant to enter 2023?

Those wishing to upgrade should pay attention to the current real estate market conditions.Photo: Getty

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Higher prices allow property upgrades

Since the outbreak of the pandemic, domestic house prices have continued to rise by almost 30%. In some cities and provinces of the country, prices have risen by more than 40% of his.

This means that nearly everyone who owns property (more than two-thirds of Australian households) has experienced significant property values ​​(the value of their homes minus the amount they still owe). I mean

Home equity is very important to the activity of the housing market. To upgrade, you must have sufficient funds to pay both the new home security deposit (usually 20% of the purchase price) and transaction costs (stamp duties, brokerage fees, etc.).

So the rally in stocks during the pandemic can help people reach the next stage on the housing ladder or invest in new real estate.

These strong stock positions are the main reason why the housing market activity (home sales rate) reached very high levels in 2021 and early 2022.

After that, however, market activity declined. This is despite prices continuing to rise significantly to pre-pandemic levels in much of the country.

So why are sellers seemingly losing confidence even though they have sizable stock positions?

Interest rates limit the use of stocks

A big factor is rising interest rates.

The RBA has raised interest rates by more than 3% at a record pace since May 2022. This has reduced the amount people can borrow from him by more than 25%.

Sentiment among those with mortgages, including potential upgraders and investors, has dropped significantly over renters and outright owners in recent months.

This plunge in sentiment could be due to the pressure on household budgets from higher mortgage payments. This is in addition to high inflation increasing the cost of living for all Australians.

However, home equity provides some protection to upgrade buyers from rising interest rates.

Due to the equity position, a typical recent upgrade buyer borrowed just $217,500 in 2019/20. That’s almost half of the first homebuyer’s ($372,100). This is despite repeat buyers buying homes that, on average, are significantly more expensive.[1]

Low loan amounts mean that three-quarters of recent upgrades have housing costs less than 25% of total household income.

However, rising interest rates still limit their purchases. A 25% drop in borrowing capacity, even if only half of the purchase price can be borrowed, can have a significant impact on the properties available to upgraders and investors.

And to the extent upgraders sell to the first homebuyer (who typically rents close to 80% of the home value), these reduced borrowing abilities can impact how much their current home can be sold for. .

This is why borrowing capacity and housing market activity have historically tended to go hand in hand.

So what is the outlook for market activity beyond 2023?

The historical relationship between housing market activity and rising mortgage rates and house prices suggests that housing market activity will continue to decline through the middle of the year, returning to roughly 2020 levels.

However, market activity has held up more than past relationships suggest, and this is likely to continue.

Market activity in 2023 has many positives.

• Equity positions of existing owners remain very strong
• Eliminates uncertainty about interest rates and borrowing capacity
• Housing demand remains very strong, revealing rental shortages in many areas across the country
• Home construction continues at a solid rate with a sizable backlog of projects not yet completed

In support of this, funding data shows that lending to investors has remained relatively resilient in the face of rising mortgage rates.

In conclusion, higher interest rates mean market activity is unlikely to return to 2021 levels. However, strong underlying market conditions may support higher activity rates than pre-pandemic.

[1] ABS housing occupancy and costs