‘It’s quite distressing’: rate rise brings new pain for would-be homebuyers

The third Reserve Bank rate hike in a row has delivered a blow not only to mortgaged homeowners, but also to those hoping to break into the property market like Dani Hunterford and her husband.

They have been saving for a deposit but have been left frustrated as another rate hike appears to put their homeowning dream out of reach again.

“It feels quite distressing to be honest with you,” she said.

Climbing interest rates generally weigh on property prices as prospective buyers factor in higher borrowing costs and the central bank works to slow the economy.

Home values in Sydney and Melbourne since late last year have been sliding from their record highs as prospective buyers began to factor in the chance of higher interest rates.

Dwelling prices in the NSW and Victorian capitals were 0.6% down in April, and 0.9% and 1.5% lower, respectively over three months.

But Gerard Burg, head of research at Cotality, said even these small glimmers of improving affordability for first home buyers were illusory as falling values have been at the most expensive end of the market.

“There has been weakness in Sydney and Melbourne property prices, but from a first home buyer perspective it hasn’t been in the markets that benefit them,” Burg said.

In particular, the cheapest 25% of properties – where most first-time buyers would be looking – are still climbing in the two east coast capitals, by 0.5% in Melbourne and 1.5% in Sydney in April.

Burg said it was no coincidence that this was the end of the market where demand has been boosted by the expansion of the government’s deposit guarantee scheme, which has allowed FHBs to buy with a deposit of as little as 5%.

“That’s been a big advantage to people who can access the scheme now, but for those who come in later, the higher prices will make it harder,” he said.

A further complication is that even where prices are falling, chances are that a potential buyer’s borrowing capacity is falling more quickly.

The average first home buyer borrowed about $607,000. And assuming a household budget of about $106,000 a year, each rate hike might cut the borrowing limit by $17,000.

“That could be the difference between getting a property and not getting a property,” Burg said.

For Australians like 24-year-old Dani, home ownership feels increasingly out of reach, even though she has worked hard to save a “quite significant deposit” with her husband.

Hunterford, who works full-time while studying a postgraduate law degree, said despite joint incomes they are struggling to save enough for a “place that would be reasonable” for them.

“My husband and I live a pretty normal life. All we want [is] a place to call our own.”

She said they fact they were “paying so much each week in rent” made it even harder to save to buy a home, and she was worried landlords would pass on higher interest rates to their tenants through rent increases.