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Why falling interest rates are bad news for Australian first home buyers


Only one in ten potential first-time homebuyers could live the Australian dream and buy their own home, alarming new research has found.

After decades of rising real estate prices left many young people unable to escape the nightmarish rental market, the research shows that it was actually the lower interest rates that made real estate unaffordable for those trying to enter the real estate market.

According to research from the Australian Housing and Urban Research Institute (AHURI), between 1994 and 2017, nearly a third of house price increases were driven by falling interest rates.

It found that the average interest rate on home mortgages fell by nearly 5 percent, fueling demand for real estate over the past 25 years, while house prices more than doubled.

“Falling interest rates may seem attractive to first-time homebuyers, but in real terms it only increases competition and pushes up prices, sometimes out of reach for those trying to get into the market for the first time,” says Professor Rachel Ong ViforJ of Curtin University School of Accounting, Economics and Finance.

Bad news for young people: The survey found that 84 percent of would-be first-time homebuyers currently don’t have enough savings for a home deposit, while 71 percent would be unable to meet mortgage repayment requirements, preventing them from entering the housing market.

It has also been investigated whether government schemes can actually help young people with lower incomes to find a home.

A mortgage guarantee scheme could help 22 percent of young people qualify as first home buyers.

Meanwhile, equity sharing would help 41 per cent of eligible homebuyers, a quarter of which would be in the bottom 20 per cent of Australia’s socioeconomic status areas.

“It is important to understand that while these schemes would support people living in areas of lower socioeconomic status, they would also likely boost housing demand in these entry-level markets,” said Prof. ViforJ.

“It is imperative that the introduction of such schemes is accompanied by an increase in the supply of local housing to avoid fueling further increases in house prices.”

Meanwhile, for Australians looking to escape the rental crunch and buy their own homes, Canstar warns potential buyers that debt, including car loans, college fees and credit card limits, could wipe out thousands of dollars from buyers’ borrowing power.

It found that a single person with an average income of $94,000 could reduce their $372,000 loan balance by $75,000 by having a $30,000 car loan hang over their head.

The same goes for higher education debt, where average HECS-HELP debt of about $24,000 could reduce an individual buyer’s borrowing power by as much as $57,000 to $315,000.

A credit card with a $10,000 limit could cut as much as $46,000 off the amount a home buyer could borrow, it also warned.

Canstar editor-in-chief Effie Zahos said that as real estate prices start to rise, affordability will take a hit.

“While aspiring homebuyers have little control over rising home prices, they can scrutinize their spending and debt that could affect their borrowing power,” she said.

“An applicant juggling average HECS or HELP debt, a $30,000 car loan, and a $10,000 credit card limit could be shorting themselves up to $178,000 in loan capital.

“An individual borrower who has deducted $178,000 from their borrowing capacity can now only borrow $194,000.

“Even with a 20 percent down payment, they would be in the market for a $242,500 property, which doesn’t leave them many options. According to the latest data from CoreLogic, the nearest median property price is one unit in regional South Australia at $278,549.”

The impact on a couple’s borrowing power is even greater when you factor in the running costs of a second car, a larger credit card limit, and starting a family.

A couple with one partner working full-time and the other part-time has a combined estimated borrowing capacity of $609,000.

Running a second car could cut this by $42,000, while a large credit card limit of $25,000 could cut $117,000 off the potential loan.

“Couples planning to start a family should consider what having an extra mouth to feed could mean for their finances. If at least one child is added to the equation, a couple’s borrowing capacity would decrease by $20,000 to $589,000. Having two or three children would reduce their borrowing capacity by $41,000 and $61,000, respectively,” she said.

“Getting a home loan can be a bit more difficult for families. While you would assume that applicants can effectively double their borrowing power by combining incomes, homebuyers with dependents typically have more expenses, which can offset even the strongest incomes.

“The point is that you can save as much as possible on your expenses when applying for a loan. It’s also important that you can keep up those cost-cutting methods to prevent mortgage stress later on.

Reserve Bank

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.