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The average Sydney family can borrow $65,500 less to buy a home than two months ago, and that is set to worsen with further interest rate rises on the way, new modelling shows.
Many first-home buyers and young families are sitting on the fence as they face increasing mortgage repayments and cost of living pressures, and economists say they may have to compromise on the quality or location of their next home.
An average family of four, with one full-time working parent and a part-time working parent, would have had a maximum borrowing capacity of $871,400 in April but could now borrow only $805,900 after the May and June rate hikes, RateCity modelling shows.
By May 2023, their maximum borrowing power could be cut by $144,900 if the cash rate reaches 2.25 per cent, as Westpac economists forecast.
An average single person who could have borrowed a maximum of $676,400 two months ago can now only borrow $626,500 after the two rate hikes. That could drop to $561,200 by next year.
The calculations assume a borrower has no other debts, minimal expenses and gets a pay rise by next year.
First-home buyers and young families are hesitant to buy as rates continue to rise.Credit:Peter Rae
RateCity research director Sally Tindall expects house prices will continue to fall as buyers’ budgets are squeezed by higher mortgages and the rising cost of living, including food, fuel and energy prices.
“We’re not going to see prices drop evenly across the country,” Tindall said. “Some people live in areas that are prone to needing to borrow at maximum capacity because of high prices like Sydney and Melbourne and other hot spots in regional areas.”
Sydney home values are already down 2.8 per cent over the past quarter on CoreLogic data as buyers have pulled back, factoring in future rate rises. A further hike is expected when the Reserve Bank meets on Tuesday.
On Thursday NAB forecast Sydney property prices to fall 8.8 per cent this year and 13.4 per cent next year. But those falls may not be enough to offset higher borrowing costs in some pockets of Sydney, where prices remain resilient thanks to high demand.
Brokers and agents say buyers are limiting their spending budget as they factor in future rate rises.Credit:Peter Rae
St George chief economist Besa Deda said while Sydney home values have been slowing since last year, some buyers may still have to compromise on quality or location as prices have not fallen enough to make up for the higher repayments.
“It may not be enough to negate in terms of higher borrowing costs and that could be more acute for some suburbs. If you’re close to transport, close to the CBD, that could still be difficult. There are cashed-up buyers waiting to get in some suburbs.”
Andrea Harrison jumped on an opportunity to upgrade in March in Sydney’s northern suburbs before her borrowing power was affected.
“I was thinking I better jump in now and buy a place when I can still qualify for the loan I need rather than waiting for a year [for prices to drop],” said the architect, who faces her interest rate rising in coming weeks.
Andrea Harrison bought her home in March in a bid to get in before rate rises affected how much she could borrow.Credit:Wolter Peeters
She listed her existing property soon after in a bid to get the best price before her potential buyer’s borrowing power was also clipped.
“In reality, maybe their borrowing capacity wouldn’t have been affected, but it was the psychological effect.”
A local selling agent, Benjamin Mulae, said entry-level buyers and young families were feeling rate rises the most in their budgets.
“They do have new affordability parameters that they didn’t have before. By the same token, certainly the medium and upper parts of the market are less sensitive to those interest rate movements,” said Mulae, who operates in Ryde, Gladesville, Hunters Hill and surrounds.
“They’re also factoring in future rises and working out comfort levels.”
He said while some realise this is an opportune time to upgrade, it has made many buyers hesitant.
Mortgage Choice Dee Why principal James Algar said in some cases his clients’ borrowing power is down by 10 per cent.
“Someone who could borrow $1 million three months ago could only borrow $900,000 today for the same income, same circumstances, just a shift in the stress testing rates the banks are using,” Algar said.
Buyers in some pockets of Sydney may have to compromise as prices hold up in the face of rising rates.Credit:Peter Rae
But he said that had been offset by a 10 to 15 per cent fall in house prices in the Northern Beaches, with few needing to make compromises just yet.
“It’s a matter of time before that turns around. The next rate rise will flow through.”
Two Red Shoes founder and mortgage broker Rebecca Jarrett-Dalton said borrowers were more cautious than banks’ serviceability assessments as they were hampered by rising costs on all fronts.
“People are very prudent and cautious,” she said. “They can technically afford [the loan] provided, they didn’t pay $14 for a lettuce. It’s cost of living stress.”
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