For first home buyers, talk of a softening property market triggered by higher interest rates may feel like a rare window of opportunity.
The Reserve Bank of Australia (RBA) hiked the cash rate for the first time in 12 years at its May meeting in an effort to curb fast-rising inflation.
Increasing rates are expected to prompt house prices to fall, with the RBA warning of a 15 per cent drop if rates increase by 2 per cent.
While lower house prices should be good news for first home buyers, financial commentator at Canstar Steve Mickenbecker said rising interest rates were a double-edged sword.
On one hand, falling house prices is good news because it narrows the deposit gap, meaning people don’t need to save quite as much to get a foothold in the market.
It would also allow people to take out smaller loans in the first place.
On the other hand, rising interest rates mean people can borrow less and have higher mortgage repayments to make.
For a couple with two incomes of $90,000 each, Mickenbecker said that would be a reduction in the borrowing capacity of about $33,000.
Once the cash rate gets to 2 per cent, people will be able to borrow 18 per cent less, bringing their borrowing capacity down to 1.066 million from 1.293 million.
“That's the other side of the coin, repayments go up and people just can't afford as big a loan,” Mickenbecker said.
But won’t one compensate the other?
“Yes, but it needs a big fall in property prices to compensate for the diminishment of your borrowing capacity,” Mickenbecker said.
Eliza Owen from CoreLogic also said the decline in prices would come alongside the higher cost of debt.
For the typical Australian dwelling in a 2 per cent interest rate world, even a 20 per cent fall in property prices would mean mortgage repayments would still be higher than they at present due to the higher cost of debt.
However, she noted that these were calculations based on standard assumptions around income, savings and property prices, and that there were some first home buyers who would benefit from the drop in price.
First home buyers who had been squirrelling money away and were close to saving a 20 per cent deposit were in a particularly good position, she said, because falling house prices would mean their deposit would make up a greater portion of the purchase price.
“The reality is there may be a lot of first time buyers who have been saving and be somewhere near the 20 per cent deposit level,” Owen said.
She said first home buyers would be wise to do some back-of-the-envelope calculations to see what higher interest rates would mean for them.
“I think first time buyers can look forward to potentially lower prices as interest rates rise, that they should just be aware that that can increase their monthly mortgage repayments.”
Higher rents will make it harder to save
For people with a lot more saving to do, rising rents are likely to dampen their ability to save.
Owen said there had been an upswing in rental values of around 14 per cent since rentals first started increasing in August of 2020.
“That doesn't look like it's easing anytime soon, particularly for some of the larger capital cities like Sydney, Melbourne,” she said.
Owen pointed to the return of overseas migration driving up demand and fewer new properties being built due to a tight labour market and supply chain issues in the construction industry.
The silver lining was wages were trending upwards, she said, which would help people service higher rents while saving for a deposit.
On balance, Mickenbecker said the outlook for the property market was good for first home buyers.
“I think it's a real plus having a loan that's $200,000 or less when you start.”
Mickenbecker was more concerned about buyers who had recently purchased a home.
“It's not great for people who have bought recently who sort of really stretched to get in and can now find their tight equity being eroded as prices fall.”