Prices are well up, so why are sellers so down?

Home prices are significantly higher than before the pandemic, accumulating large equity gains for Australians who own housing.

Equity is a key requirement for home upgraders, which in turn is important to unlock homes for first-home buyers to get into the market.

However, after booming in 2021, market activity has slowed considerably. With lots of equity to play with, why are sellers more reluctant going into 2023?

Higher prices enable property upgrades

National home prices remain up almost 30% since the onset of the pandemic. In some cities and regional parts of the country, prices are up by more than 40%.


This means almost everyone who owns property – more than 2/3 of Australian households – has seen significant equity gains (the value of a home less how much is still owed on it).

Home equity is very important for housing market activity. Upgraders need enough funds to pay for both the deposit on a new home (typically 20% of the purchase price) and the costs of the transaction (stamp duty, agent fees etc.).

Equity gains throughout the pandemic can therefore enable people to reach the next rung on the housing ladder, or invest in new property.

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


But market activity has since decreased. This is despite prices continuing to be up considerably on pre-pandemic levels across much of the country.

So why have sellers seemed to lose confidence despite their sizeable equity positions?

Interest rates limit the use of equity

A big factor is higher interest rates.

The RBA has increased interest rates by more than 3 percentage points since May 2022, the fastest pace on record. This has reduced how much people can borrow by more than 25%.

The sentiment of those with mortgages, which includes potential upgraders or investors, has fallen significantly more than renters or outright owners over recent months.


This plummet in sentiment is likely due to the pressure higher mortgage repayments are placing on household budgets. This is on top of high inflation, which is increasing the cost of living for all Australians.

But home equity insulates upgrade buyers from interest rate increases to some extent.

Due to their equity positions, a typical recent upgrade buyer borrowed just $217,500 in 2019/20, almost half that of first-home buyers ($372,100). This is despite repeat buyers purchasing substantially more expensive homes, on average.[1]

Their smaller loans mean three-quarters of recent upgraders have housing costs less than 25% of their total household income.

But higher interest rates still limit their purchases. 25% lower borrowing capacities can have a meaningful impact on what properties an upgrader or investor can buy, even if they only borrow half the purchase price.

And to the extent upgraders sell to first-home buyers (who typically borrow close to 80% of a home’s value), these borrowing capacity reductions can affect how much they can sell their current home for.

This is why borrowing capacities and housing market activity historically tend to have a close relationship.


So what’s the outlook for market activity over 2023?

Looking at the historic relationship between housing market activity and mortgage rates combined with home price growth suggests that housing market activity will continue to fall into the middle of this year – roughly back to 2020 levels.

But market activity has held up better than historical relationships would suggest, something that is likely to continue.

There are a number of positives for market activity over 2023:

  • The equity positions of existing owners remain very strong
  • The uncertainty about interest rates and borrowing capacities will dissipate
  • Housing demand remains exceptionally strong, with rental shortages evident across much of the country
  • Housing construction will continue at a solid rate, owing to the significant backlog of projects yet to be completed

Supporting this, financing data shows investor lending – typically to those with strong equity positions – has remained relatively resilient in the face of mortgage rate increases.

In conclusion, higher interest rates mean market activity is unlikely to return to 2021 levels. But strong underlying conditions in the market are likely to support higher rates of activity than was seen before the pandemic.

[1] ABS Housing Occupancy and Costs

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