Potential home buyers on an average income have had their budgets slashed by more than $300,000 due to rising interest rates.
But property prices did not fall as steeply and are now going up again, leaving buyers squeezed as both sticker prices and mortgage costs get more expensive.
Families hoping to buy a home have had their budgets cut by a string of interest rate rises.Credit: Joe Armao
A home hunting couple with no children could spend $1,038,000 at auction while the cash rate is 4.1 per cent, modelling from comparison platform Canstar shows.
That assumes they have saved a 20 per cent deposit, slash their living expenses to a frugal level to maximise their borrowing power, and each earn an average income of $94,000 a year based on ABS figures.
But in April last year, that couple could have spent $1,422,000 if they had the deposit ready. Their budget since dropped $384,000 as the Reserve Bank raised interest rates at the fastest pace in a generation.
The bank on Tuesday held interest rates steady for the second straight month, saying recent data showed inflation was falling, and higher interest rates were working to balance supply and demand.
An average couple could no longer borrow enough to purchase a median priced house in Sydney, which cost about $1,334,000 in July on CoreLogic figures.
That’s a drop of only $109,000 since April last year, a far more modest change compared to the cut to their spending power.
The average couple could afford the median house in Melbourne, valued at about $924,000, and down only $86,000 since April.
Brisbane’s median house value of about $820,000 is down just over $71,000 in the same time period, while Perth’s house value actually rose $28,000 to almost $626,000 - albeit well within the average couple’s budget.
Canstar group executive of financial services Steve Mickenbecker said affordability has worsened despite the drop in property prices since early 2022.
“People have a lot less borrowing power to actually get into the housing market,” he said.
“In April last year before the Reserve Bank moved, the really limiting factor on people was the amount of deposit they could put away.
“That’s no longer the case - the interest rates have a much bigger impact than that now.”
He highlighted the budget of a single buyer which has fallen from $606,000 pre-rate hikes, to $445,000.
In some areas of Australia buyers could find a unit for that price, but in many they could not, Mickenbecker said. CoreLogic figures show the median unit value in Sydney was $817,000 in July, about $604,000 in Melbourne, $520,000 in Brisbane and about $422,000 in Perth.
The cuts were also steep for buyers with a family.
The average double income family with children could expect to spend up to $990,000 on a home, a cut of $363,000 since rates first rose.
For a family on one-and-a-half incomes, their budget fell to just $680,000, a drop of $247,000.
AMP chief economist Shane Oliver said he thought cuts to borrowing capacity would have led to a bigger fall in house values.
Prices started to fall but then took off again, as there was more buyer demand than the low supply of homes for sale, immigration increased and the rental crisis prompted some to buy instead, Oliver said.
“It means people end up having to settle on a lower quality property, or a smaller property, or less desirable area, or rely on the Bank of Mum and Dad,” he said.
Not all borrowers would be left with such a diminished budget.
An upgrading couple with a 40 per cent deposit would still have a budget of $1,391,000 at a cash rate of 4.1 per cent, although this had fallen by $519,000 since April 2022.
PRD chief economist Dr Diaswati Mardiasmo said some buyers had been shocked to realise they could not get better value for money during the housing downturn because their borrowing capacity had fallen so much faster than prices.
But other buyers may have saved extra cash during the lockdown years or managed to get a better job amid the tight labour market, putting them in a better position to purchase and bid prices up.
“We still have this affordability issue because there is that mismatch between how much house prices are going up and how much borrowing capacity is going down,” she said.
“[But] so many people are at different stages of their financial decision because of Covid - it blurs where the price ceiling is.”
Mortgage broker Chris Foster Ramsay said some buyers were adjusting their property search after changes to borrowing capacity and property prices.
“People 12, 15 months ago had an area in mind that they wanted to live in, and they’d become emotionally attached to that area,” he said.
“As borrowing capacity moved, as prices moved in the area, they perhaps need to look outside that area, in a suburb or two across.”