Sydneysiders were trying to buy a home. Then $400,000 evaporated

Sydney home buyers have had their borrowing power slashed by as much as $433,000 since interest rates began to rise nearly two years ago.

It means those relying on a home loan to buy a property are left to compromise on a range of factors from location and size to type of home, as well as often leaning on family for financial help.

Higher income earners and those who profited during the pandemic boom are poised to continue to dominate the housing market according to experts.Credit: Peter Rae

In many instances, buyers have delayed their decision to purchase altogether as they face the double whammy of rising prices and repayments.

But the Reserve Bank’s change in tone this week has raised hopes that rate rises could have finally come to an end, signalling some relief for borrowers.

On average, home buyers have had their borrowing capacity slashed by about 30 per cent since before rates began to rise almost two years ago, modelling from comparison platform Canstar shows.

A couple on average incomes could borrow up to $1,385,000 in April 2022 when the cash rate was at rock-bottom, before it started rising the following month.

That same couple can now only borrow up to $952,000 after 13 rate rises have eroded 31 per cent – or $433,000 – of their borrowing capacity.

And an average income earner has had their borrowing power cut to $371,000 down from $540,000.

Sydney’s median house value reached more than $1,395,000, while the median unit reached about $837,000 in February on CoreLogic data.

The modelling is based on the average owner-occupier variable rate then and now, a 20 per cent deposit and the Australian average income.

Canstar’s group executive of financial services Steve Mickenbecker said rising mortgage repayments have exacerbated the difficulty of buying a home in Sydney.

“When you looked back two years ago, before the RBA started putting rates up, the big barrier entering the property market was getting a deposit together, and with rates as low as they were still able to afford the mortgage, but that’s switched around,” Mickenbecker said.

“The deposit is still a big barrier to entry, but the affordability of repayments has knocked them about compared to two years ago,” he said.

He said households already in the market have it slightly easier as they have built up some equity, but they are still affected.

“It just shows the impact of this interest rate cycle has on people’s lives and how far back it puts their planning for getting ahead in life. It can really put it back by a number of years, to raise the deposit but to get to the point of affording a loan.”

Commonwealth Bank’s head of Australian economics Gareth Aird said it was unusual for buyers to be hit by rising prices while mortgage rates were increasing too.

“That borrower power has gone down but at the same time house prices are above their previous peak,” Aird said. “It’s an anomaly given the sharp reduction in borrowing power.”

While it affects anyone relying on taking out a mortgage to buy a home, it hurts first home buyers most, then upgraders, Aird said.

“For new entrants in the housing market, they simply can’t afford to borrow as much. They’re not going to be able to buy the same quality of dwelling.”

He said while rate cuts would provide some relief, it should be kept in context of how fast home values will also increase as a result.

Equilibria Finance’s managing director and senior broker Anthony Landahl said buyers’ borrowing power had fallen across the board between 30 to 40 per cent.

“A client who could borrow $1 million before rate rises would now be borrowing $700,000,” Landahl said. “The decrease in borrowing capacity has not been matched by the housing market which is back in the growth phase.”

He said most buyers were compromising or finding ways to bridge the gap in their borrowing power to keep up with rising property prices and repayments.

“They are drastic things. Some people are either getting second jobs, looking for jobs with additional income, looking at a different job to get more money,” he said.

“Some people are talking to their parents about gifts, people are changing the properties they are looking for and the areas. Some are looking to buy investment properties. They’re massive adjustments for people.”

In one instance, a couple who have been looking to buy for about a year lost $200,000 in their borrowing power. They had to draw down on more savings and look at different property types.

“[Buyers are] either compromising on what they might be able to do and what they might be able to afford, some people have said let’s keep earning income, some people are stopping their search a little bit until they wait to see what is happening in the market,” Landahl said.