Soaring rents and inflation will drain capacity to build a deposit

Tim Lawless of CoreLogic points out the major banks assess home loan borrowers by adding 3 per cent to the actual rate offered.

A triple hit now looms for potential home buyers. Soaring rents and elevated inflation will drain their capacity to build a deposit while the banks will be assessing their ability to service a mortgage on an assumed rate close to 9 per cent.

The dismal combination means a rare opportunity to take advantage of falling house prices is being missed by a generation of home buyers who may not get the chance again.

As Tim Lawless of CoreLogic points out the major banks assess home loan borrowers by adding 3 per cent to the actual rate offered.

But rates have moved higher and faster than any borrower – or bank lender – might have anticipated.

“If you include the latest increase and then you add that 3 per cent buffer the banks impose for security, new borrowers need to be able to pay a home loan based on rates nearer to 9 per cent”, says Lawless.

As official data shows the market share of first home buyers remains below the market’s long term average, a survey released by Australian Property Professionals suggests that 70 per cent of Australians “believe it is too hard to buy your first home because of higher rent prices and interest rate hikes”.

Official rates are now at 3.6 per cent, while standard variable mortgage rates are close to 5.5 per cent. In the days ahead many mortgage rates will float nearer to 6 per cent after the latest change will mean another $117 a month to $1,474 on a $750,000 loan. In total the extra amount owed by a borrower at this level would be up $1,577 since April 2022, according to the Canstar research group.

At the same time rent costs are soaring. In the last 12 months the average “asking rent” in the major cities increased by 30 per cent – a multiple of our already elevated inflation rate.

As rental prices soared in recent months it is the bottom end of the market that is feeling the most acute pain – recent data shows the number of homes in the city of Melbourne available for less than $400 a week has dropped by half.

And even if the banks continue to report there is little to worry about in the way of mortgage defaults we know that the bank data “lags” the situation on the street.

According to the Finder group: “In data from February, more than one in eight homeowners have missed a monthly mortgage repayment in the past six months, and given the latest hike, this will only get worse. There is also evidence that many more homeowners are facing very difficult situations in relation to banks”.

There are also serious stress indicators among so-called “mortgage prisoners” — that is the cohort who have been on long term fixed rate arrangements which were set at the bottom of the rate cycle and now have little chance of accessing the special offer mortgage deals in the market today.

In addition, there are also the borrowers who are now facing negative equity – this refers to an estimated 120,000 people where their mortgage is bigger than the value of their home – the latest rise will push this numbers in this group higher again.

Ironically, the key reason the RBA has put through its unexpected string of rate rises – with potentially more to come – is to combat inflation.

However, with inflation at above 7 per cent and the RBA official target below 3 per cent there is little evidence the procedure of lift official rates is making enough difference.

As Pradeep Philip head of Deloitte Access Economics suggests “economic growth and inflation have slowed faster than expected making the wisdom of this decision hard to understand … we need to take a holistic way at ways to tame inflation”.