Research reveals grim reality for homeowner hopefuls

New research has revealed a grim reality for those trying to get into the property market: it would take a first-home buyer a whopping 17.5 years to save a 20% deposit to purchase a Sydney home with rising interest rates.

Across the combined capital cities, it would take 14 years to save a house deposit. 

According to investment bank Barrenjoey, Hobart took the second-longest time to put together a 20% deposit, with buyers having to save for 13.7 years to accumulate the money, while Brisbane is not far behind with 13.2 years, and Melbourne with 12.8 years, news.com.au reported.

In Adelaide, buyers had to spend just over a decade saving for a home deposit, while it would take those in Perth 9.2 years.

Darwin was the most affordable capital, with buyers only needing 6.8 years to save for a deposit.

Super-sized interest rates, however, would also impact buyers’ borrowing capacities, with forecasts that the amount of money people can borrow will plunge by around 25% by the middle of next year.

And if interest rates lift to 3.8%, overall borrowing capacity would decline by 30%, which would be the largest drop in borrowing capacity in modern times and would also hit house prices, the research found.

“Worryingly, t. is clear downside risk to this outlook,” the Barrenjoey report said. “Indeed, if interest rates rise to current market pricing, and inflation is strictly applied to borrower’s expenses, borrowing capacity could decline by more than 35%. We would expect this to trigger an even more severe correction in the housing market and credit growth, having implications for the economy and banking sector.”

The bank warned that higher interest rates and inflation then predicted could spell a bigger disaster, news.com.au reported.

“The combination of these factors could see borrowing capacity fall as much as 37% lower from the peak by mid-2023,” the report said. “Such an outcome would undoubtedly see house prices fall further than our base case, impacting the broader economy. We would expect the RBA to be quickly easing monetary policy in this scenario.”

According to the bank’s modelling, Sydney house prices could fall a massive 25% to 30% due to rising interest rates.

Reserve Bank Governor Philip Lowe recently tipped a 10% fall in house prices across the nation.

But with housing affordability at a record low, t.’s also bad news for current homeowners.

Mortgage repayments in Sydney were already taking up more than 61% of disposable household income – but rising interest rates would likely push this figure even higher, the Barrenjoey analysis found.

“In the next three to six months we expect the rise in interest rates to outweigh falling house prices, driving the cost of servicing a new mortgage to new highs,” the report said.

Monthly home loan repayments have surged to 49.4% of income on average across Australia’s capital cities, from a low of 34% during the pandemic, but it’s expected to get even worse.

The Barrenjoey report said that “in the very near term, the rapid rise in interest rates (both fixed and floating) is expected to outweigh falling house prices with the cost of servicing a new mortgage on the median dwelling expected to increase to a peak of 56% of median income – a record high for the indicator on a national level,” news.com.au reported.

source