Borrowing power in Australia has dropped faster than property values, making it harder to buy a home today than at the start of the year. While the Albanese government has argued that falling prices improve affordability, five interest rate increases since February have erased more than $100,000 from the typical home loan budget. Capital city prices have fallen 8.1% since the market peaked in March, with a median price dropping by $83,131 to just over $1 million.
Serviceability challenges hit borrowers hard
Mortgage broker Lendi chief executive Sebastian Watkins said no clear winner has emerged from the current market. First-home buyers have been waiting for these price drops to enter the market, but banks have tightened lending standards. “They’ve been watching these price falls thinking this is finally their time to get in,” Watkins said. “But now the banks have cut their budgets because serviceability is through the roof; many of them can’t even borrow the loan anymore.”
According to Aussie, a couple earning the median wage of $90,500 a year with a 20% deposit has seen their borrowing power fall by 10.6% in 11 months. Their maximum loan amount dropped from $974,836 to $871,859. A single buyer with the same income can now borrow $53,236 less, with a maximum of $450,721. The Reserve Bank’s decision to lift rates to the highest level in 18 years has pushed the typical variable mortgage rate to 6.74%. This forces new owner-occupiers to prove they can repay a loan at nearly 10%, a level not seen since the mid-1990s.
Household budgets under strain
Analysis by PropTrack shows existing homeowners are also under pressure. The average Australian household will dedicate 36.9% of its budget to mortgage repayments once the latest rate increase is passed on, up from 32.8% in the March quarter. Realestate.com.au senior economist Luc Redman noted that this share of income is close to the levels seen in 1989 when people paid interest of 18%. “Whilst interest rate increases do cool demand, the decline in home prices has not been enough so far to offset reduced borrowing capacity,” Redman said. “As a result, households buying homes are likely, in the short term, to spend a higher proportion of income on repayments.”
Canstar estimates that those with a $700,000 loan are paying an extra $6,384 each year in interest. The combination of falling house prices and rising borrowing costs creates a difficult environment for potential buyers. As lending standards tighten, the window for affordability to improve remains narrow. Sebastian Watkins stated that first-home buyers have been particularly affected by these changes. Watkins also noted that the current market has not clearly benefited any group of buyers.
