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First home buyers have dropped out of the property market more sharply than upgraders and downsizers, new figures show, as rising interest rates reduce the amount of money they can borrow.
Subsequent buyers who can partly fund a home purchase with the sale of their existing home are less likely to need to borrow large sums and are less affected by jumps in the cash rate.
First home buyers are dropping out of the market faster than upgraders.Credit:Justin McManus
The value of new loans to first home buyers dropped 15.8 per cent between April, the last month of the rock-bottom cash rate, and July, the latest month for which official figures are available, CoreLogic analysis found.
This compared with a drop of only 5.8 per cent in lending to subsequent buyers, which includes upgraders, downsizers and other movers.
As the property market weakens, the value of loans to investors also fell sharply, down 16.1 per cent in July.
“We’re seeing first home buyers have a very strong reaction to higher interest rates,” CoreLogic head of residential research for Australia Eliza Owen said.
“Housing affordability is definitely pivoting from the problem of a deposit hurdle to the problem of ongoing mortgage costs.”
She said despite the government assistance on offer to first home buyers, some potential borrowers may have been deterred because they had to revisit their pre-approval amount as interest rates rise.
First home hopefuls with significant savings or high incomes may be able to take advantage of falling house prices, but the rest are likely to find that fall has not yet offset the rise in mortgage costs, she said.
“Ultimately a downswing doesn’t improve affordability for first home buyers, it just lowers the deposit hurdle,” she said.
A recent report found house price falls of greater than 25 per cent would be needed to improve housing affordability because of the burden of higher mortgage repayments, but most economists do not expect prices to fall that far.
Upsizers are likely to be in a better position because they can trade in an existing home to reduce the size of their mortgage, Owen said.
She expects both first time buyers and subsequent buyers to continue to drop out of the market as long as interest rates are rising.
The drop is a contrast to previous market downturns when government incentives were introduced to encourage first home buyers, such as the first home owner grant on offer during the Global Financial Crisis that pushed lending to first time buyers to record levels, she said.
Anthony Landahl, managing director of Equilibria Finance, has noticed a drop in first home buyer activity.
Rate rises are affecting how much they can borrow, while their cost of living is going up, making first home hopefuls uncertain, he said.
“A lot of first home buyers [are] reassessing what they can afford, and sitting back and waiting until things settle down a bit,” he said.
“For people in a position to upgrade, they are starting to look at what they can afford… They may not have the same challenges around saving for a deposit.”
He said young buyers coming to him now are making interest rates a “pretty critical part of the conversation”, as there are more rate rises to come.
Pearse Financial director Tom Pearse said July and August have been among the quietest months for enquiry from first home buyers in the last two years, a period that included rolling lockdowns.
He has had minimal calls about the federal government’s popular First Home Guarantee program that allows purchases with a 5 per cent deposit, which surprised him as buyers had previously been keen.
Some buyers have found their borrowing capacity has been cut by as much as 20 per cent to 30 per cent since this time last year, he said.
Demand from home buyers has fallen as interest rates rise.Credit:Justin McManus
There has been a modest uptick in enquiry in recent weeks, though, as the traditional spring selling season begins.
But he felt demand from upsizers in his patch was dropping even more because their budgets have been dropping faster than house prices are falling.
“Maybe they want to buy a house for $1.5 million, and you are probably good to $1.3 million,” he said. “$1.3 million may be okay when the market comes off … That is the challenge: how do you catch the market?”
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