Home seekers squeezed out of houses in one of biggest mortgage blowouts in Sydney history

Home seekers are being squeezed out of Sydney houses in one of the biggest mortgage blowouts in history - and more pain is set to come next week.

Soaring interest rates have been strangling the last hopes many Sydney residents had of buying a house with a backyard – and by Tuesday their dreams of house ownership could be dealt a killer blow.

Alarming mortgage analysis has revealed another rate rise next week on top of recent hikes would skim hundreds of thousands of dollars off buyers’ borrowing capacity.

This would leave some buyers who could afford houses earlier this year with budgets too small to purchase the bulk of Sydney’s detached dwellings.

It comes as recent rate rises have reduced buyers’ borrowing by 19.68 per cent since earlier this year.

Another 0.5 per cent rate rise, expected to be announced at next week’s Reserve Bank board meeting, would stretch the drop in borrowing capacity to nearly a quarter, according to the PropTrack data.

Angela Karanjai and Sam Elman, with daughter Maya, at their Arncliffe home which they are selling. Prices have plateaued in the area.

That would mean a buyer who qualified for a $750,000 loan earlier this year – the higher side of the first homebuyer average loan and enough to buy a house in 120 suburbs if using a 20 per cent – would only be able to borrow $574,000.

The $176,000 drop in budget would reduce the suburbs where they could afford the typical houses to just nine.

The nine suburbs – including Airds in the southwest and Wilmot in the west – were 50-80km from the Sydney CBD and private sales were rare due to the dominance of public housing.

Housing experts said the issue was arising because recent falls in home prices (an average of 6 per cent since April) were not large enough to offset buyers’ lowered borrowing capacity.

PropTrack economist Paul Ryan said there would need to be much bigger price falls to mitigate the impact of soaring mortgage costs.

“It’s a very challenging time for first homebuyers,” he said. “Buyers have less borrowings to play with, price falls have been very gradual compared to interest rate rises and rents are going up quickly.”

He added that each 0.5 per cent raise in the cash rate has translated to about a 5 per cent drop in buyers’ borrowing capacity.

Mortgage Choice broker James Algar said buyers who last year got pre-approval for loans that later expired were often shocked to discover how much their loan options had depleted.

“They’ll often talk about how they’re seeing value in the market. There’s more for sale at the price they wanted last year. Then they realise they can’t buy at that price anymore,” Mr Algar said.

“It can be a difficult thing for clients to process. Last year they couldn’t get into the market because it was too competitive and there wasn’t enough housing available. Now they can’t borrow enough.”

This boarded up home is for sale in Blackett, one of the last locations still affordable for those buying with a $600,000 mortgage.

Buyers who qualified for bigger loans earlier this year will see the most dramatic drops in their borrowing capacity following another rate rise on Tuesday, according to PropTrack.

Those who could borrow $1 million would only get $765,000, while buyers who could get $2 million before would have their borrowing capacity slashed to $1.53 million.

Qualifying for a $1.53 million loan would require the buyer to have a household income of close to $300,000 per year, putting them within the top 5 per cent of earners.

McGrath agent Bill Tsounias – who sells homes in the St George region, a popular market for those priced out of the inner west – said most first-time purchasers who could snap up large houses were “young executives”.

They tended to have high paying jobs and were buying their first homes well into their careers, he said.

The other buyers who could afford the region’s houses were upsizers using the proceeds from a previous sale to fund a big chunk of the purchase, Mr Tsounias added.

Buying a detached house has become difficult for first homebuyer but units remain affordable.

“Prices haven’t really dropped in this area because the buyers are in a position where they have to buy and just get on with it. Most purchasers are buying and selling in the same market,” he said.

Angela Karanjai and Sam Elman have listed their four-bedroom Arncliffe home on Duff St for auction next weekend and were recently shopping for a new home in the inner west.

Ms Karanjai said the mood at open for inspections was a “completely different experience” from last year when they bought their Arncliffe house.

“Properties were packed last year,” she said. “This time there were just two or three people. Agents were nicer. Last year, agents didn’t return your calls. This time they were very eager.”

Ms Karanjai said it was a very different market from last year.

Mr Algar said fewer buyers were willing to push the envelope this year, even if they could get a larger loan.

“People realise we live in a world where rates aren’t staying low. Covid made people forget that,” he said, adding that more buyers were prepared to settle for smaller homes.

“You will struggle to buy a house as a first homebuyer unless you have a lazy $500,000 at the back of the sofa, so we see a lot more people going for a unit.”