Homebuying in Australia just became harder,
Would-be homebuyers are facing a lose-lose situation, with declining borrowing capacity and property prices that remain stubbornly high.
Experts argue that modest declines in house values, like those in Melbourne, have been outpaced by shrinking borrowing capacities.
Meanwhile, in Sydney, the median house value has risen higher than when interest rates began to increase, exacerbating affordability issues.
A household earning twice the average income has seen its borrowing capacity reduced by $307,000 since May 2022.
This represents a 24 per cent decrease, according to Canstar modelling, since the Reserve Bank started raising interest rates.
Similarly, a single person’s borrowing capacity has also dropped by 24 per cent, reducing it by $132,000.
No capital cities have experienced house price drops close to 24 per cent, with Hobart showing the largest decline of 13.1 per cent.
In comparison, Melbourne saw a 7.2 per cent fall, while Sydney’s median house value has increased by 4.4 per cent.
In April 2022, a dual-income household could borrow a maximum of $1,271,000, according to Canstar estimates.
However, today they can borrow only $964,000, despite modest wage growth over the period, significantly limiting purchasing power.
For a single person, the borrowing capacity is now just $421,000, highlighting the disparity between households.
Interest rate hikes have had the most significant impact on borrowing capacity, with 13 increases raising the cash rate to 4.35 per cent.
As a result, this cash rate has remained at 4.35 per cent, unchanged since the most recent decision on Tuesday.
How house values have shifted since interest rate hikes started.
| City | Median house value April 2022 | Median house value October 2024 | Increase/decrease |
|---|---|---|---|
| Sydney | $1,416,960 | $1,478,925 | 4.4% |
| Melbourne | $1,000,926 | $928,808 | −7.2% |
| Brisbane | $880,332 | $974,025 | 10.6% |
| Adelaide | $676,546 | $864,487 | 27.8% |
| Perth | $578,751 | $838,547 | 44.9% |
| Hobart | $793,723 | $690,003 | −13.1% |
| Darwin | $576,149 | $585,912 | 1.7% |
| Canberra | $1,070,220 | $976,911 | −8.7% |
Canstar’s data insights director, Sally Tindall, stated that borrowing capacities have been “shredded” due to the interest rate hikes.
As a result, it has become even more difficult to purchase property in Australia, which was already unaffordable.
She added that, for property hotspots like Sydney, prices have remained relatively stable when comparing pre-hike values to current prices.
However, despite stable prices, an individual’s borrowing capacity has dramatically decreased, making homeownership increasingly out of reach.
“Melbourne is one of the cities where prices have dropped, but the decline has not matched the reduced borrowing capacity.”
Tindall further explained that buyers hoping to enter previously affordable markets like Brisbane, Adelaide, and Perth face higher median values.
This makes it even more challenging for those looking to buy in these areas compared to Melbourne’s current market conditions.
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“It’s not surprising that capital cities with lower price tags initially have seen significant growth due to supply and demand.”
She explained that in these areas, borrowers weren’t reaching their maximum borrowing capacity, making them less affected by rate hikes.
AMP Capital’s chief economist, Dr. Shane Oliver, said house prices are currently about 26 per cent higher than they should be.
This estimation assumes that prices are directly tied to borrowing capacities, with the gap peaking at 29 per cent.
“There has been some improvement in households’ ability to pay due to interest rates being on hold for a year.”
Additionally, incomes have risen slightly, but the gap between prices and borrowing capacities remains large and unchanged.
CBA’s head of Australian economics, Gareth Aird, highlighted that buyers now need larger deposits and face higher repayments.
This is because of the ongoing mismatch between high house prices and the reduced borrowing capacities of potential buyers.
“From a first-time homebuyer’s perspective, it’s much harder to enter the market now compared to a few years ago.”
He added that many first-time buyers are turning to the ‘bank of mum and dad’ for financial support.
Experts suggest that this transfer of intergenerational wealth to assist in buying property is contributing to the disconnect.
Equilibria Finance founder and broker Anthony Landahl noted that the combination of rising mortgage rates and property prices has altered buyer behavior.
Some buyers have even decided to delay purchasing a home altogether due to these increased financial pressures.
Landahl pointed out that buyers are adjusting their expectations, now opting for townhouses or units rather than traditional houses.
He also highlighted that many buyers are finding it difficult to both enter the market and upgrade their current homes.
“Buyers might explore different areas, moving further out from their current locations due to price disparities in their preferred areas.”
For instance, upgrading from a unit to a house has become increasingly difficult due to a widening price gap.
Landahl explained that the price difference between houses and units has grown significantly, making it harder to upgrade locally.
Dr. Shane Oliver argued that house prices may not escalate once rates are cut, as it’s unlikely they’ll drop to previous levels.
Even if the Reserve Bank cuts rates four times, to around 3.35 per cent, borrowing capacity won’t return to 2021 levels.
Oliver emphasized that one of the main drivers of property prices over the past 30 years may no longer be as influential.
“The idea that property prices will always keep rising might no longer hold, as cheap debt is no longer available,” he said.
