Over the last ten years household consumption levels within Australia typically have grown faster than household disposable income levels. More recently the trend to withdrawing equity and using the funds for other purposes has become popular due to the significant increase in property prices. A recent Reserve Bank of Australia (RBA) survey aimed to identify how different Australian households injected and withdrew equity into their home loan. The survey also discovered how the households that withdrew equity went about spending the proceeds.

The survey was commissioned in early 2005 and it involved the participation of 4,500 households. The questions asked were in relation to housing transactions and expenditure levels within 2004. According to the survey results approximately 30.1% of households injected equity whilst 11.7% withdrew equity. The remaining surveyed households had either fully paid off their home or did not own property.

Injectors

Of the 30% of households that were classified as injectors there were three different ways in which they choose to inject equity into their home loan. The different methods used to inject equity are as follows:

1. Reducing debt on an existing property represented 19% of all surveyed households. Approximately 9.6% of households made the regular scheduled repayments and 6.7% made regular repayments above the minimum required by the lender. A further 2.1% made irregular lump-sum repayments. The size of the lump-sum repayments tended to be relatively large, ensuring that they accounted for a excessively high share of the amount of equity injected (in monetary terms). A small percent of households also refinanced loans, increased their offset balance or would not comment on the matter.
2. Renovating a property was undertaken by 6.5% of households, partly by utilising savings.
3. Property transactions represented 4.6% of households with approximately 3.6% purchasing more properties than they sold. These households were either described as a first home buyer or an investor. Approximately 1% represented the households that sold more properties than they purchased as well as buying and selling an equal number of properties. The median equity figure invested in a property was $59,000.

The following graph shows how the injected equity was distributed. In terms of monetary value there were large numbers of households attempting to reduce their debt level via small increments and a relatively small number of households purchasing property via large down payments. Approximately 50% of the funds injected were utilised for a property transaction, whilst 33% were used for reducing the level of debt on an existing property and a further 18% went towards renovations. The most popular use of the money injected was for purchasing more properties than selling i.e. first home buyers and investors.

Withdrawers

Of the 11.7% of households that withdrew equity there were two main methods in which a household went about doing so:

1. Approximately 7.3% of households increased debt on their existing property with the most popular method being refinancing and new loans (4.5%), followed by redrawing (1.4%). The remaining households either used revolving credit or withdrew from an offset account or would not specify how.
2. Approximately 4.4% of households undertook a property transaction with 2.7% of households selling more properties than purchased.

Of the total monetary value of equity withdrawn approximately 72.1% was attributed to a property transaction i.e. decreasing property holdings, whilst 27.9% was attributed to increasing the debt on a property holding. Despite limited numbers of households partaking in a sale the monetary values involved are typically high. The median amount withdrawn by these households was $126,000. Approximately 54.1% of equity withdrawn was due to households selling more properties than purchasing. The households that decreased their property holdings have either sold their principal place of residence or an investment/second property. A relatively small number of households also withdrew equity but also increased their property holdings. Of the households that choose to increase their debt levels the most popular method was by refinancing and new loans. This can be seen in the following graph:

How were the funds spent?

Of the households that withdrew equity by borrowing against a property approximately 55% utilised the funds to finance consumption. However only 18% of households that withdrew equity via a property transaction used the funds for consumption purposes. The most popular use of equity from a property sale was for investing, not necessarily within the property market.

The RBA has estimated that during 2004, of the households that increased their debt levels on an existing property, approximately $20 billion was withdrawn and $6 billion was spent on consumption. However the level of consumption financed by increasing housing debt is only equivalent to 1.25% of the total level of consumption.

In conclusion equity withdrawal has not funded a consumption spending spree but rather growth of asset accumulation.