Hopeful homebuyers have been warned that falling house prices will not improve housing affordability, despite the average time it takes to save a deposit that has reached over 11 years during COVID.
New data reveals that many households backtracked in their efforts to overcome the home deposit hurdle in the two years to March, with soaring home prices far outpacing income growth.
The time to save a deposit has increased at the fastest rate on record during COVID-19, CoreLogic and ANZ Bank said Thursday, with the median measure of time to save for a mortgage reaching an astonishing 11.4 years.
And there’s little relief in sight for potential home buyers, who are grappling with rapidly rising rents and higher interest rates, both of which will eat away at any relief associated with lower home prices. ‘real estate.
“Falling house prices are not necessarily good news,” said Eliza Owens, head of research at CoreLogic.
“It will only shift the affordability challenge from the hurdle of deposit to mortgage repayment.”
But buyers may find “windows of opportunity” to enter the market before rate hikes take hold, or even after the next rate hike cycle ends, when house prices have likely fallen. , said Ms. Owens.
Falling prices will not solve the housing affordability crisis
House prices have already started to fall in Sydney and Melbourne now that the Reserve Bank has started raising interest rates for the first time in more than a decade.
With more hikes to come as the RBA attempts to rein in inflation, experts predict house prices will fall between 5-15% (depending on who you ask) over the next two years.
However, the latest data shows that even such steep price cuts will not necessarily improve affordability for many households, as higher rates will reduce buyers’ borrowing power.
“Falling prices in the face of higher interest rates always means your mortgage payments will be higher, unless house prices fall by more than 20%,” Ms Owens said.
“Higher mortgage rates will affect your borrowing capacity and the cost of your debt.”
Analysis released Thursday found that if rates rise 2.25 percentage points and house prices fall 15%, the cost of a 20% deposit for the median property will fall by more than $14,000.
But monthly mortgage payments would increase by $285 under the same scenario, meaning homebuyers would still pay several thousand dollars more over the life of their loan.
And they would have to convince their bank that they can afford to repay that debt.
Unless house prices fall by 20% or more, housing affordability — measured by the multiples of annual income needed to pay a mortgage — will deteriorate as rates rise, not fall. will improve.
Worse still, households that rent while saving a down payment are also penalized by rapidly rising costs.
Ms Owens said national median weekly rents increased by $60 between August 2020 and March 2022, with declines in inner-city markets like Sydney and Melbourne more than offset by increases in regional markets.
“It’s been a double whammy of rising rents and house prices,” Ms Owens said.
windows of opportunity
Despite this bleak picture for future homeowners, Ms Owens said there should still be “windows of opportunity” to break into the market depending on your personal financial situation.
For example, buyers who have already saved a large deposit and are currently in the market could benefit from securing a home before further rate hikes erode their borrowing power.
Similarly, households still saving a deposit may want to wait until house prices have bottomed out, because at that point rate hikes could already be priced in, making further hikes less likely. .
However, since the outlook for house prices and interest rates is so uncertain, buyers are advised to review their options with qualified advisers before making any decisions.
Buyer’s agent Arjun Paliwal, head of research at InvestorKit, agreed that there are still opportunities for buyers in the market.
He said demand for properties, particularly in Sydney and Melbourne, is now declining as rates rise, meaning there is less competition in the market.
“It’s times like now that provide buying opportunities because there are fewer people per listing,” he said.
“Opportunities lie where the sentiment changes.”
But anyone taking the plunge now should consider how their borrowing costs will evolve as rates rise over the next two years.
Currently, the official exchange rate, which feeds home loan rates, is 0.35%. But the RBA has suggested it could be as high as 2.5%.