Australian households undertook a $6 Billion spending spree on the home buying up plasmas, home theatre, cars and holidays.
The Reserve Bank has released the results of a survey which indicate that Australian households withdrew an estimated $6Billion in home equity during 2004 and then directed it toward consumption.
The RBA was trying to work out why household spending continues to increase when household income remains stagnant. Since the mid 1990s, says the Bank, household consumption has grown faster than household disposable income, and that over recent years, in contrast to previous experience, housing-related borrowing has exceeded spending on new housing and renovations, i.e. equity had been withdrawn and used for other purposes.
With a few qualifications and assumptions here’s what happened.
The Bank surveyed 4500 households to find out whether they had increased/decreased their home equity debt and what they had done with the money. The survey found that 11.7 per cent of households made a net withdrawal of equity over 2004, while around 30 per cent made a net injection of equity over the year.
About 7.25 per cent of Australian households withdrew an average of $20,000 of their home equity by increasing their debt on existing property, primarily by refinance an existing loan or drawing upon previous excess principal payments revolving equity type facilities. Those that did this tended to be single income households where the income earner was in their 40’s.
The survey asked households that made a withdrawal of equity what they did with the funds and were prompted with a number of possible answers, including using the funds for various types of consumption, the purchase of various assets, and the repayment of non-housing related debt, says the Bank.
Around 14 per cent declined to answer the question, but o a significant share (18 per cent) of the equity they withdrew over the year was used mainly for consumption-type expenditure, the bulk (58 per cent) of the funds were used mainly for asset accumulation, with an additional amount (8 per cent) used to pay down other debt.
The results also show that households borrowing against existing property most likely to use the funds to finance consumption. Around 55 per cent of households that borrowed more against their home equity used it on consumption – purposes such as home decorations, holidays, consumer durables and motor vehicles. A further 5 per cent of households withdrawing equity in this way cited consumption as a use, but not the main use, of the withdrawn equity.
With some qualifications, the Bank says its survey suggests that in 2004, around $20 billion was withdrawn by Australian households increasing debt on existing properties, with at least $6 billion of this being used to finance consumption. This added about 1.25 of consumption expenditure in 2004.
Add to that equity withdrawn during property transactions to that (although most appears to have been allocated to other assets, says the Bank) and you have an even bigger fillip for the home spending pie.
The survey also found that 6.5 per cent of households spent money on renovations, by decreasing their equity or paying for the renovations (at least in part) from other funds. The Bank says that in many cases renovations have been funded, at least partly, from the increased equity built up as a result of the large increases in house prices over recent years.
The survey indicates that around 11 per cent of households spent money on renovations in 2004, with the median amount spent on the main home equal to $13,500. Around 40 per cent of these households used housing debt to at least partly finance their renovation expenditure, with debt finance being used more often for larger renovations. As with the households increasing debt on an existing property for other purposes, households borrowing to finance renovations typically did so by refinancing an existing loan.