More than a Quarter of Residential Properties Sold in Australia’s Eastern States Were Bought Without a Mortgage

Introduction

According to property data firm Pexa, more than a quarter of residential properties sold in Australia’s eastern states last year were purchased without a mortgage. This suggests that there is a significant group of buyers who are unaffected by aggressive interest rate rises aimed at taming inflation. The analysis conducted by Pexa reveals that approximately 25% of home and land sales in New South Wales, Queensland, and Victoria were made without a mortgage. The proportion of cash purchases has remained stable since before the Covid-19 pandemic, but their total value has increased due to the property boom caused by the pandemic.

Cash Purchases Remain Stable, but Total Value Increases

Pexa’s analysis indicates that the percentage of cash purchases has not significantly changed since before the Covid-19 pandemic. However, the total value of these purchases has risen due to the surge in property prices during the pandemic. In 2022, approximately $122.5 billion worth of homes were cash funded, accounting for 25.6% of residential sales in the three eastern states. Although this is slightly lower than the $124.8 billion worth of housing exchanged without a home loan in 2021, it is significantly higher than the $83.6 billion recorded in 2020.

Majority of Cash Buyers Are Older Homeowners

According to Mike Gill, the head of research at Pexa, the data suggests that the majority of cash buyers are older homeowners who have already paid off their mortgages. These buyers are purchasing homes to retire in. The study found that most cash purchases were made in regions popular with retirees and in postcodes where the median dwelling price was below the state averages. This has implications for the Reserve Bank of Australia in its fight against high inflation, as this cohort of buyers is less impacted by rising interest rates.

Younger Generations Bear the Brunt of Rising Rates

The findings from Pexa’s analysis suggest that younger generations are bearing the brunt of rising interest rates, while older generations often benefit from higher interest rates through their savings accounts. The recent interest rate increase by the Reserve Bank of Australia, which took the cash rate to 4.1%, has added to the burden faced by borrowers. Since May last year, borrowers have experienced 12 interest rate rises, and RBA governor Philip Lowe has warned that more may be needed to control inflation.

Rebound in Home Prices Raises Concerns

One concern for the Reserve Bank of Australia is the rebound in home prices, which can make people feel wealthier and lead to increased spending. A separate report from valuation firm PropTrack suggests that national home prices could reach a new peak in January 2024 if the current pace of growth continues. Last year, when interest rates started weighing on the market, property prices experienced a 4% decline from peak to trough. However, the market has already recovered 1.55% of that decline, with Sydney leading the turnaround.

Conclusion

The significant proportion of cash purchases in Australia’s eastern states suggests that there is a sizeable cohort of buyers who are unaffected by rising interest rates aimed at taming inflation. These cash buyers are often older homeowners who have paid off their mortgages and are purchasing homes to retire in. The stability of cash purchases and the increase in their total value during the pandemic property boom have implications for the Reserve Bank of Australia in its fight against high inflation. Meanwhile, younger generations bear the brunt of rising interest rates, while older generations benefit from higher rates through their savings accounts. The rebound in home prices raises concerns for the RBA, as it can lead to increased spending and further inflationary pressure.