More than 25 per cent of homes sold in Queensland, Victoria and NSW last year were bought without a mortgage by older Australians who have benefited from high property prices and are "basically immune" to the effects of rising interest rates, highlighting a "generational divide" in the housing market.
Key points:
- 25.6 per cent of residential properties sold in eastern states were purchased with cash in 2022
- Property research group PEXA says it's mainly older Australians who are downsizing and have benefited from high house prices
- Regional areas see a greater proportion of cash-only purchases due to cheaper property prices
New research published by property insights group Property Exchange Australia (PEXA) found that $478.6 billion of residential property was sold in 2022, with $122.5 billion worth of property paid for in cash.
The research found 25.6 per cent, or 135,544 residential properties sold last year, were purchased without a mortgage, meaning the Reserve Bank of Australia's rate hikes will not impact a significant portion of the population as it tries to drive down high inflation.
In Victoria, New South Wales and Queensland, the majority of cash purchases were made to buy a dwelling instead of blocks of land.
The figures exclude commercial property purchases, but the research notes that buyers may have used "existing loan facilities" to make the purchase, such as equity from other properties, or overseas buyers using foreign lenders.
PEXA's head of research Mike Gill said the majority of cash purchases were by older Australians who are retiring and looking to downsize, and have benefited from high house prices.
"They've probably sold a family home, and obviously benefited from increase in pricing over the last few years at least, and then they've used the proceeds of that to then fund the next property," he said.
Older people who are downsizing are also able to contribute up to $300,000 from selling their homes into their superannuation fund, provided they have owned their home for at least 10 years.
Mr Gill said cash buyers tended to be "green changers" moving from the city to country areas, which traditionally have cheaper property prices.
"[This research] does highlight the generational divide between borrowers," he said.
"Younger home owners are more likely to have larger home loan balances, particularly those who have purchased recently, whilst many older home owners are likely to have paid their home loan off or be able to pay cash for a home to retire in.
"Therefore, as the RBA raises interest rates to slow the economy and fight inflation, the burden falls more toward younger Australians who are more sensitive to rising rates and less so on older generations who may in fact benefit if they have savings."
Where are people paying in cash?
PEXA's research found cash-buyers paid more in affluent urban areas, where house prices are typically higher than in the regions.
The Gold Coast had the highest value of cash purchases in 2022, with $1.33 billion spent in Broadbeach, and $1.27 billion spent in nearby Surfers Paradise.
Toorak in Melbourne had the third-highest total of cash purchases, at $893 million, with $668 million spent in Brighton.
In Sydney, $725 million was spent on cash purchases in Mosman, and $596 million was spent in Potts Point.
"Obviously, that's driven by high property prices in those areas," Mr Gill said.
"But it also signifies that there's wealthy people who are able to have sufficient funds to buy into those areas without needing a home loan."
PEXA's research also found there was a clear skew of people buying properties in cash in regional Queensland and NSW.
In Queensland, Tara, Russell Island and Gin Gin were the top three postcodes with the greatest proportion of cash purchases, while Emmaville, Gloucester and Wombah had the highest proportion of cash purchases in NSW.
In Victoria, where only 36.8 per cent of cash purchases were made in a regional area, the greatest number of properties paid for in cash were in Yarram, Paynesville and Metung.
Mr Gill said purchasing properties in cash was not new, and had been happening at a similar rate in recent years.
In 2021, $124.8 billion worth of residential property was purchased with cash, with $50.4 billion purchased in 2020.
"Can we say for certain that this is a phenomenon that's just occurring now with these higher interest rates we're seeing? Probably not," he said.
"Going back to 2019, the proportion of overall purchases with cash has remained pretty steady at 25 per cent, which would suggest that this is not something that's dramatically increased.
"The fact that property prices have gone up so much, this is impacting the amount of money that cash buyers are having to spend, so that's happening all the time."
Is this making inflation worse?
The Reserve Bank raised interest rates for the 12th time in just over a year on Tuesday to try and bring down inflation; PEXA's research noted that older cash buyers are now benefiting from savings that attract higher interest payments.
"Older Australians, especially the ones that are paying cash for new property, are basically immune to interest rate rises," Mr Gill said.
"If you don't have a home loan, that doesn't really worry you. In effect, if you've got savings in the bank, many older Australians might actually benefit from higher interest rates because you get paid a higher interest rate and you're saving.
"So, when the interest rates are raised by the Reserve Bank, that disproportionately affects younger borrowers or borrowers who bought more recently and paid higher prices for property.
"They're taking bigger loans to fund those purchases, and they are very exposed to rising interest rates, and so it does cause them a lot more pain than perhaps the older demographic."
He said the argument could be made that older people making property purchases in cash were driving inflation.
"You could make that case, because they are buying property, they are investing in the market, which is spending, which will have some inflationary impact on property prices," he said.
"It's probably a longer string to draw in terms of their overall spending patterns — we don't have any data to suggest that they're out there spending in other categories — but it does make sense that they're able to go on that overseas holiday or dine out because they're less impacted by interest rates.
"A lot of younger borrowers with those big loans, they're having to pull back on discretionary items, like going out to dinner, streaming services, all those sorts of things, even their mortgage repayments are increasing dramatically.
"That's not something that obviously a cash buyer is going to be too worried about."
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