Home buyers’ budgets slashed by hundreds of thousands, pushing property prices down

Home buyers’ budgets have been slashed by hundreds of thousands of dollars, new figures show, as rising interest rates squeeze the amount the average Australian can borrow.

Five rate rises since May this year have trimmed the loan size that buyers can qualify for, and put downward pressure on house prices.

A couple earning two average incomes of $92,000 each can now borrow $264,000 less than they could have in April, a Canstar analysis shows, after the cash rate jumped from a record low 0.1 per cent in April to 2.35 per cent this month.

Even with a 20 per cent deposit saved, a couple’s maximum budget has dropped from more than $1.63 million to $1.37 million.

A couple with one full-time and one part-time income have had their borrowing power cut back by $195,000 since April and single income earners can borrow $115,000 less.

The modelling assumes buyers slash their living expenses to a modest $16,500 for a single and $20,580 for a couple to calculate a maximum budget. Many buyers do not borrow to their limit.

The Reserve Bank’s head of domestic markets, Jonathan Kearns, last week said buying power had been cut by about 20 per cent, while mortgage repayments had risen by 25 per cent since interest rates rose.

As buyers’ budgets have been cut, house values are falling. The latest CoreLogic Home Value Index showed house values in Sydney had already dropped 7.6 per cent since peaking, while Melbourne’s fell 4.6 per cent. Other capitals have also recorded falls in more recent months.

In Sydney’s west, principal agent of Laing and Simmons Merrylands George Lattouf said vendors were already being forced to meet the market as buyers’ budgets were slashed.

One client who had listed a home in the Parramatta CBD after the Federal election in May was offered $2.05 million at auction, which they rejected. The home recently sold for $1.83 million.

“They’ve lost around $220,000 in seven weeks,” Lattouf said. “Vendors just need to accept what buyers are willing to pay.”

Though house prices were falling in some pockets of Parramatta, rents were on the rise, making buying a home more attractive for those who qualified for a mortgage. Some rents were as high as monthly mortgage repayments, Lattouf said.

“The market has dropped slightly in the Parramatta district, but rents are soaring. Landlords are saying now we can increase the rent after two years of COVID,” he said.

In Melbourne, Wheatley Finance director and mortgage broker Andrew Wheatley said new first home buyers weren’t noticing the changes, but those who had already been pre-approved for a loan or were returning to the market were more aware.

“What has been very annoying is that clients get pre-approval for 90 days to buy and then when they are re-assessed they qualify for much less,” Wheatley said.

If pre-approved buyers find a property and want to make an offer, they may not be able to afford to do so.

“People setting their sights on a certain type of property even three months ago, have had to readjust what they’re looking at,” he said.

Wheatley said agents are also more willing to entertain an offer subject to finance, as buyers thinned out and property prices started to fall, something they were less willing to do before interest rates rose.

Though mortgage sizes have already taken a hit, it could get worse, after the US Federal Reserve lifted rates by 0.75 percentage points last week – the third time this year they have increased by that amount.

Some commentators have suggested Australia will follow suit in lifting rates to a high level to try and curb the rising cost of living. Some economists predict interest rates will reach 3.35 per cent by next year.

Westpac’s chief economist Bill Evans recently predicted another 0.5 per cent rise in interest rates in October, while the Commonwealth Bank’s head of Australian economics Gareth Aird believes there will be a 0.25 per cent increase in October and another in November.

With more interest rate rises on the horizon, Canstar’s editor at large and finance commentator Effie Zahos said people needed to take a close look at their spending before applying for a mortgage.

“I think if you are going to get a home loan now, have a good look at your digital footprint and see where your money is going,” Zahos said. “Get rid of your credit cards if you can and get rid of any ‘buy now, pay laters’ – put yourself in the best possible position.

“Because a credit card with a $10,000 limit can reduce any loan you’re looking to get by $50,000.”