Analysis: Why falling property prices are actually bad news for first home buyers | jcollett_money
Prospective first home buyers’ relief in seeing property prices fall could be short-lived as higher interest rates reduce the amount they can borrow and the gap between what they can afford and house prices widens.
Falling house prices may not be the blessing for first-time buyers it seems, with higher interest rates reducing their borrowing capacity.If the cash rate climbs 2 per cent, which some economists are forecasting to be the top of the current tightening cycle, the couple’s borrowing capacity would reduce by almost 18 per cent to $1,066,000.
However, as interest rates rise, their borrowing power would continue to be depleted. Rents are rising rapidly, too, making it harder for first home buyers to save their deposit. Philip Lowe, Reserve Bank governor, has indicated that official interest rates could eventually rise to 2.5 per cent, but with no guidance on how quickly this would be achieved. Money markets are expecting the cash rate to reach an even higher 2.75 per cent by year-end.
“We expect the combination of worsening affordability, along with rising mortgage rates, to drive a top to bottom fall of 10 to 15 per cent in average home prices [nationally] from mid-year out to early 2024,” he says.Commonwealth Bank economists are forecasting Sydney dwelling prices to track Melbourne declines to fall 3 per cent this year and 9 per cent in 2023.
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