Australian first-home buyers face shrinking budgets as rate hikes outpace modest property price falls

Borrowing Capacity vs. Price Declines

Data analysis based on Westpac’s latest property forecasts indicates that Sydney’s median house price could fall by a further $29,601 between May and the end of December, while Melbourne’s median is expected to decline by $18,128 over the same period. However, these potential price reductions are being offset by a sharper contraction in buyer affordability. A single person earning the average full-time wage has already seen their maximum borrowing capacity drop by $35,800 due to rate rises this year, a figure that exceeds the forecast price falls in either capital city.

Should two further 0.25 percentage point rate increases occur as forecast, that same individual’s total borrowing capacity could shrink by approximately $57,600 since the start of the year, representing a roughly 10% reduction in their buying budget. For couples, the cumulative reduction in borrowing capacity is even more pronounced, standing at $71,600. In Sydney, where entry prices remain significantly higher, this disparity is particularly acute, as buyers require larger loan amounts to secure a foothold in the market.

Market Dynamics and Regulatory Constraints

The divergence between falling prices and shrinking budgets is compounded by regulatory constraints. The Australian Prudential Regulation Authority (APRA) has confirmed it will maintain the serviceability buffer for new mortgage applications at three percentage points. This requirement means borrowers are assessed on their ability to service a loan at an interest rate 3 percentage points higher than the actual lending rate. With current assessment rates pushing well above 9%, this buffer acts as a significant hurdle for new applicants, limiting the number of households that can qualify for finance.

While the federal government’s proposed reforms to negative gearing and capital gains tax were intended to reduce investor competition and assist first-home buyers, the immediate market response has been one of caution rather than entry. Loan applications from first-home buyers have fallen by more than 20% since the budget announcement. The uncertainty surrounding the implementation of these tax changes, combined with higher interest rates, has prompted many potential purchasers to delay decisions, contributing to weak auction clearance rates and a widening gap between seller expectations and buyer offers in Sydney and Melbourne.

“Modest property price declines don’t necessarily improve affordability when higher mortgage rates are stripping tens of thousands of dollars from buyers’ budgets,” said Sally Tindall, data insights director at Canstar.com.au. “Anyone hoping APRA might throw borrowers a lifeline by reducing the serviceability buffer will be disappointed. Lifting the buffer would more than likely lift property prices, which is the last thing most would-be first home buyers want.”

The forecast for the broader market suggests a bifurcated outcome. While Sydney and Melbourne face continued price pressure, other capital cities are expected to perform differently. Perth and Brisbane are projected to see median prices rise by approximately $39,000 and $32,000 respectively by year-end, despite the interest rate increases. This regional divergence highlights that national policy changes do not uniformly impact all housing markets, with local supply and demand fundamentals continuing to play a decisive role.

Policy Trade-offs and Future Outlook

The current situation illustrates a complex policy trade-off. While reducing regulatory barriers such as the serviceability buffer could theoretically increase borrowing capacity, it carries the risk of stimulating price increases, potentially exacerbating affordability issues in the long term. Conversely, the current high-rate environment, designed to cool inflation and credit growth, is inadvertently removing potential buyers from the market. With loan applications declining and price corrections remaining modest in absolute terms, the gap between the cost of borrowing and the value of assets continues to widen, leaving first-home buyers in a state of suspended animation as they navigate an increasingly constrained financial landscape.