Here’s Why Plummeting House Prices Won’t Make It Easier To Enter The Property Market

Borrowing capacity has decreased by 20 percent for some homebuyers.

borrowing capacity

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If you’ve read the news in recent weeks, you’d know that property prices are plummeting after years of significant growth, but before you go planning your dream home — it’s worth noting that buying a house won’t necessarily be any easier.

Property prices are falling at rates we haven’t seen since the global financial crisis (GFC), with prices in Sydney down 5.2 percent since January. However, prices will need to drop by a massive 28 percent to bring the market back to pre-pandemic levels.

But apart from the fact that house prices have only dropped to a point that it is still prohibitively expensive for most people, reduced borrowing capacity means your chances of entering the property market remain largely the same — if not worse.

Higher Interest Rates Mean Lower Borrowing Capacity

On Tuesday, the Reserve Bank of Australia (RBA) raised the interest rate to 1.85 percent, up a massive 1.75 percentage points since May. The cash rate has been increasing in an attempt to tackle the country’s rising inflation, but unfortunately, this means the big banks are passing this on to customers in the form of lending rates.

TL;DR: interest rates are going up, which means borrowing capacity is going down.

The Australian Prudential Regulation Authority (APRA) has blamed the declining borrowing capacity on interest rates. “The recent reduction in borrowing capacity has largely been driven by the increase in official interest rates,” a spokesperson told the ABC. “All else constant, an increase in interest rates will mean that the maximum amount that households can borrow against their income will decline.”

Borrowing Capacity Has Dropped By Up To 20 Percent

Some home buyers have reported their borrowing capacity has plummeted by more than 20 percent, despite the actual price of housing dropping by just a fraction of that.

“If an applicant has an annual income of $200,000 and no debt, their borrowing capacity on a 2.5 per cent variable loan was around $1.4 million before this new rates cycle,” Entourage brokerage group managing director Damien Roylance told Domain back in June — before the last hike.

“But if interest rates continue climbing to five percent, their borrowing capacity drops to around $1.1 million — that’s 20 per cent less.”

Homebuyers Are Being Warned To Reevaluate

Buyer agents are now warning first home buyers to reevaluate their borrowing capacity on a monthly basis after pre-approvals have been reneged due to changing conditions.

“Borrowers need to look at their capacity every month,” buyers’ agent Lloyd Edge told Domain“You might get a pre-approval that generally lasts for three months, but the banks can’t commit to that at the moment because with an interest rate rise that can actually affect what you can borrow in the very next month.

“Which means you cannot afford the property you were initially approved for.

“With a few rate rises, month after month, they need to adjust their expectations and realise they are probably going to need to look for properties that are under their initial budget, so they have a decent chance of being able to afford it.”

Cost Of Living Is Making Things Worse

To make matters even worse, the rising cost of living — AKA the thing that is making our lives hell right now — is also impacting borrowing capacity because, well, being alive is much more expensive than it was a few years ago.

But in addition to making you wince in pain every time you pay $2.30 per litre for fuel, these increased living costs are making homebuyers’ minimum monthly expenses higher. Not only does this mean it’s harder to save the 20 percent deposit to actually buy a house, but it is impacting borrowing capacity as well.

“We’re seeing an increase in the cost of living, and we’re seeing that flow through to some of the serviceability calculators of the providers,” Sydney mortgage broker Anthony Landahl told the SMH. “Their minimum expense requirement has been creeping up.”