Why falling interest rates are bad news for Australian first homebuyers

Just one in 10 potential first homebuyers could actually achieve the Australian dream and buy their own property, alarming new research has revealed.

After decades of soaring property prices locked many young people out of ever escaping the nightmare rental market, the research shows it was actually lower interest rates which made property unaffordable for those trying to enter the property market.

From 1994 to 2017, almost a third of the increase in house prices has been driven by falling interest rates, according to research from Australian Housing and Urban Research Institute (AHURI).

It found the average interest rate on owner-occupier mortgages fell by almost 5 per cent and as a result, demand for properties grew over the past 25 years, while house prices more than doubled.

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

In grim news for young people, the study revealed 84 per cent of aspiring first homebuyers do not currently have enough savings for a home deposit, while 71 per cent would be unable to meet the mortgage repayment requirements, preventing them from entering the housing market.

It also assessed whether government schemes could actually assist young people on lower incomes to own a home.

A mortgage guarantee scheme could help 22 per cent of young people to qualify as first homebuyers.

Meanwhile, a shared equity scheme would assist 41 per cent of eligible homebuyers, a quarter of which would be in the bottom 20 per cent of Australia’s socio-economic status areas.

“It’s important to understand that while these schemes would support people living in lower socio-economic status areas, they would likely also boost demand for housing in these entry-level markets,” Prof ViforJ said

“It’s imperative the introduction of any such schemes is matched by an increase in the supply of local housing in order to avoid fuelling further house price rises.”

Meanwhile, for Australians wanting to escape the rental crisis and purchase their own home, Canstar is warning would-be buyers that debts including car loans, university expenses and credit card limits could be wiping thousands of dollars from buyers’ borrowing power.

It found a single person earning an average income of $94,000 could be short-changing their $372,000 borrowing power by $75,000 by having a $30,000 car loan hanging over their head.

The same goes for higher education debt, where the average HECS-HELP debt of around $24,000 could cut a solo buyer’s borrowing power by as much as $57,000 down to $315,000.

A credit card with a $10,000 limit could slice as much as $46,000 from the amount a homebuyer could borrow, it also cautioned.

Canstar editor-at-large Effie Zahos said as property prices start to climb, affordability will take a hit.

“While aspiring homebuyers have little control over rising property prices they can take a close look at their expenses and debts that could be affecting their borrowing power,” she said.

“An applicant that juggles the average HECS or HELP debt, a $30,000 car loan and a $10,000 credit card limit could be short-changing themselves by up to $178,000 in borrowing power.

“A solo borrower who has had $178,000 deducted from their borrowing power can now only borrow $194,000.

“Even with a 20 per cent deposit, they would be in the market for a $242,500 property, which doesn’t leave them a lot of options. According to CoreLogic’s latest data, the closest median property price is a unit in regional South Australia for $278,549.”

The impact to borrowing power for a couple is even more significant when you factor in the running costs of a second car, a larger credit card limit and starting a family.

A couple where one partner works full-time and the other works part-time would have a combined estimated borrowing power of $609,000.

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

“Couples planning to have a family would need to consider what having an extra mouth to feed could mean to their finances. Adding at least one child into the equation would see a couple’s borrowing power drop by $20,000 down to $589,000. Having two or three children would reduce their borrowing power by $41,000 and $61,000 respectively,” she said.

“Getting a home loan can be a little trickier for families. While you’d assume applicants can effectively double their borrowing power by combining incomes, typically homebuyers with dependants have more expenses, which can offset even the strongest of incomes.

“The key is to be able to reduce your expenditure by as much as possible when applying for a loan. It’s also important that you’re able to sustain those cost-cutting methods to avoid mortgage stress down the track.”

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