Borrowers' budgets aren't going as far as rates continue to climb
Home buyers have seen their borrowing capacity drop by more than a fifth as interest rates climb at the fastest rate in nearly 30 years.
An analysis by PropTrack for The Australian showed buyers with a budget of $3,000 per month could borrow $543,000 a year ago. Currently, they can only borrow $418,000. Households with a budget of $4,000 per month have seen their borrowing capacity tumble from $724,000 to $558,000. Those with a budget of $5,000 per month have seen their borrowing power drop by more than $200,000, from $905,000 to $697,000.
PropTrack economist Paul Ryan said the drop in borrowing power was a key driver of recent house price falls.
“Most people, when they’re buying, do set themselves a bit of a repayment budget depending on their circumstances,” Ryan told The Australian. “That guides quite strongly what they can afford and where they’re looking in terms of location. So the fact that we’ve had borrowing capacity fall for all borrowers by now a bit more than 20%, that has a big impact.”
The Reserve Bank has hiked rates six consecutive times since May after a stretch of record low rates and cheap credit during the pandemic. Now, the central bank’s aggressive rate hikes – with more likely to come – have spurred banks to increase repayment expectations.
James Algar, a broker for Mortgage Choice, told The Australian that fear of missing out, which spurred heightened buying activity last year, has receded.
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“There is an obvious frustration among borrowers,” Algar said. “Price went out of their reach last year, and now that [prices] are back, they can no longer borrow that amount. [Borrowers] are staging comfortably within the borrowing capacity rather than pushing the envelope. They are now actively seeking to reduce their budget if rates continue to rise.”
Prices have dropped 3.35% nationwide since their peak, although they are still 30.7% higher than they were in March 2020.
Ryan said that reduced borrowing power would hit first-home buyers the hardest, as they are less likely to have large deposits.
“The reduction in borrowing capacity is obviously tough, because you’re borrowing a bigger portion of the purchase price,” he told The Australian. “But the purchase price is falling because of these borrowing capacity reductions.”
