The last six months of Reserve Bank rate increases will have slashed the average family’s home-buying budget by roughly $195,500 once the latest hike takes effect, RateCity.com.au said
As interest rates rise, the maximum amount people can borrow falls because they are paying more in interest. Potential borrowers are put under stress tests by banks to see if they would be able to cope if interest rates climbed by up to 3%. Higher interest rates make it more difficult to pass the stress test.
According to RateCity.com.au research, a family with two kids, on a combined annual income of $150,000 before tax, could borrow $995,800 six months ago, but once the October rate hike kicks in, could only borrow an estimated $800,300.
But if the OCR hits 3.6% by April next year, as forecast by Westpac, the same family would be able to borrow an estimated $728,100, which is $267,700 less than they could have before the hikes began.
A single person with a $100,000 income before tax in April 2022, with no dependents and no debts, will see the maximum amount they can borrow drop by $146,700 due to the last six RBA hikes, including October.
By April next year, this person’s borrowing capacity could fall by a total of $202,300 if the OCR hits 3.6%.
“Rising interest rates have put Australia’s turbo-charged property market in reverse,” said Sally Tindall, RateCity.com.au research director. “Every time the RBA hikes rates, the maximum amount people can borrow from the bank takes a hit because they pay more of their salary to the bank in interest. Already we have seen significant drops across the country, a trend that is likely to continue over the next year as people’s buying budgets shrink further.”
Tindall said the latest ABS figures showed a decline in new lending as some buyers put their plans on the shelf “until they get a clearer idea of where both rates and property prices will land.”
“Some people have dropped out of the market temporarily, with a plan to get back in when prices are lower, while others are scratching their plans because they can’t afford to buy,” she said. “While property prices are set to drop over the next year or two, the long-term trend is still likely to be up – something worth remembering before hitting the panic button. Would-be first-home buyers will be looking to the forecasted drops, hoping that prices come down to a level they can afford. However, these buyers will have to clear the banks’ serviceability tests at higher interest rates, no mean feat in a rising rate environment.”
