Yahoo Finance $156,500 less: Property market to face ‘significant handbrake’
The Reserve Bank of Australia’s (RBA) rate hike, and the multiple hikes still yet to come, will affect how much potential home buyers can borrow from the bank and potentially apply a handbrake on Australia’s red hot property market.
As interest rates rise, people applying for a loan will find the maximum amount they can borrow from the bank will decrease, because they’ll be paying more interest to their bank, according to new research.
RateCity.com.au found a single person, earning $100,000 before tax with no dependents and no debts is likely to see the maximum amount they can borrow from the bank drop by around $20,000 on the back of Tuesday’s 0.25 per cent cash rate hike.
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By May next year, the same person’s borrowing capacity (the maximum amount they can borrow from the bank) could drop by a total of $123,400 if the cash rate soars to 2.25 per cent.
This includes forecasted wages growth.
Keep in mind, these calculations are estimates only. The amount someone can borrow depends on their personal situation and/or their lender.
A family with two kids, where one parent works full-time and the other part time at half the wage, on combined annual income of $150,000 before tax, will be able to borrow an estimated $26,200 less as a result of the May RBA hike.
However, by May next year, if the cash rate rises to 2.25 per cent, this same family would be able to borrow an estimated $156,500 less than they could have before the May RBA hike.
RateCity research director, Sally Tindall, said the RBA rate hikes have the capacity to apply a “significant handbrake” to Australia’s property market.
“Falling interest rates have been a driving force behind soaring property prices over the last 18 months,” she said.
“Now home loan rates are on the rise, property prices could actually come back down to Earth – or, at least, closer to it.”
Tindall said anyone planning to borrow at the maximum capacity could see their budgets shrink over the next few weeks.
“As a result, they’ll suddenly find they can no longer bid as high at the next auction they go to,” Tindall said.
“If the rate hikes keep coming, as they’re forecast to do, people could find their home buying budgets shrink further and further.”
The RBA has estimated a 2 percentage point increase in interest rates, which is now considered likely by many economists, could lower real housing prices by approximately 15 per cent over two years.
“Anyone planning to take out a new home loan in the coming months needs to carefully consider how much debt they take on,” Tindall said.
“The banks’ stress tests your loan to see if you can still afford your repayments if interest rates rise by 3 per cent. However, do your own maths to make sure you’re comfortable with that figure too.”
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