Trying to predict how many homes will sell in any given year is far more complicated than predicting prices.
While price growth is often assumed to be the main driver of transactions, the relationship between the two is surprisingly weak.
There are periods when prices rise strongly, but sales volumes fall, and others where prices go nowhere yet turnover surges.
The reason is that transactions are driven less by what homes are worth and more by whether people are able and willing to move.
This is clearly shown in long run sales data for Australia. Over the past 25 years, transaction volumes have moved through repeated boom and bust cycles, ranging from fewer than 380,000 sales a year to more than 580,000.
These swings have occurred far more sharply than price changes, population growth or housing supply would suggest.
Instead, volumes spike when financial conditions and confidence improve and collapse when they tighten, regardless of whether prices are rising or falling at the time.
The challenge is that selling a home is rarely a single decision. It is usually one part of a chain.
One household sells in order to buy another property, which allows another seller to move, and so on.
If something breaks that chain, whether it be interest rates, lending restrictions or confidence, transaction volumes can fall quickly even if prices remain high.
Prices and expectations
Over the long term, price growth does matter. Rising prices encourage owners to list because they can see capital gains and feel confident that they can achieve a good result.
Falling prices have the opposite effect, as many owners choose to wait rather than crystallise a loss.
But price is only one of many forces at play, and often not the most important one.
Interest rates
Interest rates are a major influence on volumes because they determine whether people can actually move.
When rates fall, borrowing capacity rises and upgrading, downsizing and investing all become easier.
When rates rise, households become stuck. Even people who would like to move often find they no longer qualify for the loan required to buy their next home. This quickly leads to fewer listings and fewer sales.
Extremely low interest rates was a key driver during the pandemic when we saw not only very high price growth but also high transaction volumes.
Access to finance
Closely related to this is access to finance. Lending standards, serviceability buffers and competition between banks all shape how easy it is to transact.
Periods of tight credit have repeatedly caused transaction volumes to fall sharply, even when interest rates were low.
Conversely, when credit is readily available, volumes can surge as more buyers are able to participate in the market.
This was a major reason transaction volumes fell so sharply through the late 2010s, as APRA’s tighter lending standards significantly reduced borrowing capacity even though interest rates were low.
Investor participation
Investor activity is another critical driver. Investors tend to trade more frequently than owner occupiers, and when they enter or exit the market in large numbers, total sales volumes change quickly.
Policy shifts, changes to tax settings or rental market conditions can all cause investors to pull back or rush in, amplifying cycles in turnover.
For example, when investor tax and lending rules tightened from 2017 onwards, investor purchasing fell sharply, contributing to the drop in overall transaction volumes.
Economic confidence
Economic confidence also plays an important role. When people feel secure in their jobs and incomes, they are more willing to take on the disruption and risk of moving home.
During periods of uncertainty, households often choose to stay put, which suppresses listings and transactions even if underlying housing demand remains strong.
Life stage and mobility needs
Life events drive a large share of property transactions. Marriages, divorces, new children, job changes, retirement and death all require households to buy or sell.
These moves are not optional, but they are often delayed in tougher times. When financial conditions are tight, people postpone moving if they can, which again reduces turnover.
New housing supply
The level of new housing supply also influences volumes. When construction is strong, new dwellings are being sold and existing owners are more likely to trade into them.
When building activity slows, fewer new properties enter the market, and fewer chains of transactions are created, pulling down overall sales.
Rental market conditions
Rental market conditions matter as well. Tight rental markets push renters into home ownership and make property more attractive to investors.
This lifts both buying and selling activity. When rental conditions ease, the pressure to transact diminishes.
Taxation and policy
Taxation and government policy can move volumes quickly. Changes to stamp duty, land tax, capital gains tax or investor incentives all alter the financial equation for buyers and sellers.
These shifts can bring forward transactions or cause them to be delayed, leading to short term spikes and troughs in sales.
Sentiment
Finally, sentiment has a powerful effect. When the market feels strong and headlines are positive, people become more comfortable making big decisions.
When sentiment turns negative, hesitation sets in. Even if the fundamentals have not changed, behaviour does, and transaction volumes respond.
The past decade provides a clear example of how these forces can combine to suppress activity. Between 2018 and 2020, transaction volumes fell to some of the lowest levels seen in two decades.
Credit restrictions, rising interest rates and growing economic uncertainty meant that many households simply could not or would not move.
Listings dried up, investors pulled back, and turnover slowed dramatically, even though population growth remained strong.
This low turnover had long lasting consequences. It reduced the number of homes available to buy, intensified competition for the limited stock that did come to market and contributed to the price pressures that followed.
When interest rates were cut during the pandemic and credit conditions eased, volumes rebounded rapidly as years of pent up demand were released.
Looking ahead, the outlook for transaction volumes remains challenging.
With no rate cuts expected this year and the possibility of further tightening, borrowing capacity is unlikely to improve.
At the same time, new housing supply remains constrained due to high construction costs and low development activity.
This combination suggests that turnover is likely to stay below long run averages, even if prices remain resilient.
Fewer people will be able to move, and that will continue to shape the market in the year ahead.
