Beware the falling house prices

Never bet against the house, even one that appears to be "cheaper".

Never bet against the house, even one that appears to be "cheaper".

Australian property is becoming less affordable for first-home buyers due to skyrocketing interest rates and the rising cost of living, despite steadily decreasing house prices.

Nationally, home prices fell 0.39% in August, according to fresh PropTrack data. In the capital cities, they fell 0.42%, with all capitals now below their price peaks recorded earlier in the year.

This may seem like a good thing. If property prices drop, a deposit will be cheaper and I’ll be more likely to buy. Right?

Wrong

Despite falling prices, experts say houses are not more affordable. In fact, the opposite is true, as "the interest rate increases are outpacing the decline in house prices."

"Housing hasn’t become more affordable, it’s actually become less affordable," University of Sydney associate professor Stephen Whelan said. 

"A decrease in house prices would be good news if interest rates were still at record lows, but they're not. The interest rate is going to keep on going up, your borrowing power will diminish and the price you pay for the house will increase."

PropTrack Senior Economist Paul Ryan agreed, saying: "When interest rates go up, house prices slowly edge downwards, but that process is going to take a while before prices are more affordable for more for more households."

Cast your mind back to November 2020

The pandemic had been kicking on for a bit. People were feeling uncertain about their jobs and money. The price of goods and services had dropped dramatically, because people weren't spending their cash.

And so, the Reserve Bank of Australia (RBA) dropped the interest rate to a record-low 0.01%. People felt more comfortable with their mortgages being cheaper and were more likely to splash some money on other things. Therefore, goods and services became mildly more expensive again.

But coming out of the pandemic, the cost of living has begun to rise (you don't need us to tell you that). The RBA has raised the interest rate to squash the cost of living, despite having promised to keep it at 0.01% til 2024. It is currently sitting at 1.85%, and is showing no signs of slowing down. 

"Interest rates are going to increase by another 1 or 2% over the next couple of years," Whelan said. "And houses have still got a way to fall - maybe 5-10% over the next two years - before they become affordable again for first home buyers."