‘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.

Hunterford, who ran as a Greens candidate in the ACT at last year’s election, said she had often heard from voters about the prohibitive cost of home ownership.

Last month’s Westpac consumer survey revealed that despite intense worries about the future amid the ongoing US-Israel war on Iran and predictions of higher interest rates, more than two-thirds of Australians expected home prices to continue to rise over the coming year, versus just 12% who predicted a fall.

Sally Tindall, the director of digital insights at Canstar, said that there would be some potential buyers who were able to take advantage of falling prices, particularly those who were not, like many first home buyers, borrowing as much as they could.

“We could continue to see prices slide in these capital cities that have already taken a backward step,” she said, but also noted any drop in prices was unlikely to be larger than the hit to borrowing capacity from higher rates.

Then there were the cities where prices were continuing to charge ahead regardless of higher interest rates – a double blow to first home buyers.

“In markets like Brisbane and Perth, prices are still defying gravity,” Tindall said.

Home values in the West Australian capital, for example, are up an astonishing 9.2% so far this year.

“It’s a very difficult task for somebody in Perth staring down the barrel of higher prices and higher rates and higher rents.”

Tindall said there were ways to boost your borrowing capacity.

“Things like cutting up your credit card can be a big help. And shopping around for a sharper rate really can make a big impact on how much you can borrow and what your repayments will be.

“But ultimately as a first home buyer you need to take into account how much debt you are locking in and do the ‘stress test’ yourself on whether you can afford your monthly repayments”, taking into account the potential for higher rates.

“Someone who bought perhaps at the end of last year thinking rates would go down not up would be the first to say how important it is to check and recheck your buffers.”