Withdrawal no longer the favoured method for household equity

Property owners have cooled on the idea of withdrawing housing equity to finance personal expenditure, a report from the Reserve Bank of Australia (RBA) has found.

According to the report, while “strong growth in housing equity withdrawal over 2001 to 2003 contributed to strong growth in consumption relative to income and a corresponding decline in the saving rate over that period”, the trend had “subsequently abated”.

The RBA report outlined the results of a survey of 4,500 households, commissioned to better understand how households were withdrawing and injecting housing equity.

Results found that over the past decade, flows from withdrawn household equity into financial assets had been above average, with evidence showing household equity had been used as a substitute for personal credit.

Eighteen per cent of equity withdrawn in 2004 was used mainly for consumption. However, 58 per cent was used mainly for asset accumulation, with an additional 8 per cent used mainly to pay down other debt, the report said.

The largest category of assets accumulated with withdrawn funds was deposits, accounting for around one-third of all withdrawn funds.

The most common methods of withdrawing or injecting housing equity were found to be through altering debt levels on already-owned property.

Households that were net withdrawers favoured methods such as refinancing and increasing loan sizes, the report said.

According to the paper, the trend towards housing equity withdrawal in Australia over the past 15 years reflected fundamental changes to the demand and supply side of housing finance.

“Lower nominal interest rates associated with lower inflation have allowed households to take on larger debts, and the relative stability of interest rates and the economy have given households greater confidence that they can service larger debt burdens,” the paper said.