Rising interest rates: How first-time home buyers might be affected
Interest rates are on the rise in Australia, and this is setting alarm bells ringing for home buyers – particularly for those first time buyers who do not yet have a stake in the property market.
But let’s think about this carefully and critically. It may not all be bad news for first time buyers. And, in fact, the rising interest rates could have a positive effect. For instance, if rising interest rates cause property prices to fall, first time buyers may find it easier to get their foot on the all-important first rung of the ladder.
This is not to say that rising mortgage interest rates are necessarily a positive thing. Instead, it’s important to bear in mind that the situation may not be completely negative either. There may be both upsides and downsides to the expected changes. Let’s take a look in more detail.
A long period of low interest, and surges in key housing markets
Australian interest rates hit rock bottom in November 2020, as the Reserve Bank of Australia (RBA) set a cash rate of 0.1% – the lowest rate in history. This has remained largely unchanged until the second quarter of 2022, when it began to rise again. The rate rose to 0.35% in May 2022 and jumped again to 0.85% in June of the same year, marking the first multiple rise in consecutive months since February 2000.
This was always going to be a matter of “when” rather than “if.” After such a long period of falling rates and consistently low levels, a rise was always on the cards eventually. While low rates generally translate to more affordable mortgages, has this been the case in practice over the last 18 months, or even over the last 12 years?
In 2010, the median price for a residential property in Sydney was $643,073. In 2019, after years of falling interest rates, this had skyrocketed to $1,079,490 – a 40% increase in real terms. Melbourne and Hobart also experienced significant increases in terms of property value, growing from a 2010 median of $553,693 and $334,084, respectively, to $855,428 and $482,960 – real term increases of 29% and 21%.
This suggests that low interest rates have contributed, at least in part, to soaring house prices. In turn, this is leading to grossly unfavourable terms for first time buyers who cannot leverage capital from a previous house purchase.
Could prices stabilise with rising interest rates?
If we consider the above relationship between property prices and interest rates, we might adopt a positive outlook on the current situation. Hopefully, rising interest rates could stabilise the property market, cooling house prices and making the purchase more affordable for first time buyers.
But we cannot assume that this will definitely be the case. Returning to the statistics from 2010 to 2019 – i.e., a period of falling interest rates just before the bottoming-out of 2020 – we can see that prices actually declined in some locations, such as Darwin and Perth. In these cities, median prices dropped from $616,480 and $553,460, respectively, in 2010 to $521,651 and $527,107 in 2019. This translates to decreases of 29% and 20%. Adelaide’s median prices also fell, but only by 1%.
What does this tell us? It tells us that interest rates can’t be counted upon to drive property prices in a certain direction. Low interest rates in Sydney, for example, drove the market in a very different direction to that of Perth.
Lenders assessment rates
In general, rising interest rates will impact lenders assessment rates. Basically, it becomes more difficult for applicants – particularly first time home buyers – to be approved for a mortgage.
This is likely to be an obstacle for many. Buyers may find that the deposit they saved up is no longer enough to secure the home they want to buy, so they are forced to raise more money. Alternatively, they may find themselves having to compromise on the property they want.
They may also decide to defer their purchase, although this is not likely to be the best option. Interest rate increases are likely to continue over the coming year, which means a deferment might leave the applicant worse off.
Find the mortgage product you need with Sydney Brokers
Here at Sydney Brokers, we help buyers to navigate the difficult process of purchasing a home. This means providing an array of mortgage options, helping you find the ideal candidate for your needs even as interest rates rise. Reach out to our team today to get started.
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