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An Australian on an average salary has seen his borrowing capacity drop by nearly $140,000 as a result of eight Reserve Bank interest rate hikes, making it much more difficult to buy a home.
The RBA’s 0.25 percentage point rise last Tuesday has pushed the cash rate to a 10-year high of 3.1 percent, adding $91 to monthly payments on an average $600,000 mortgage, with borrowers typical willing to pay $934 more than in April.
The RBA’s eight consecutive monthly rate hikes have severely diminished the amount the bank can lend to prospective buyers.
RateCity calculations obtained by Daily Mail Australia show that a worker earning an average full-time salary of $92,030 has seen their borrowing capacity fall by $138,900, or 20.3 per cent, since the record cash rate era. of 0.1 percent ended in May. .
In April, a single professional with no children or other loans could borrow $684,100, but the latest rate increase brought that down to $545,200.
An Australian on an average salary has seen his borrowing capacity drop by almost $140,000 as a result of eight Reserve Bank interest rate hikes, making it much more difficult to buy a house (pictured, one Melbourne house)
With a 20 percent down payment, the average income worker can still buy a $681,500 home.
Eight months ago, this same borrower was able to purchase a home for $855,125.
This reduced borrowing capacity would still be enough to buy a home in Perth, where $585,989 was the median price in November, but is below Adelaide’s median price of $702,392, according to CoreLogic data.
It would also make a mid-distance Brisbane suburb out of reach for someone looking for a house, with $798,552 as the median price. Typical workers would be locked out of similar suburbs in Sydney and Melbourne unless they bought an apartment.
RateCity’s figures are based on the average variable rate with a Big Four bank rising to 5.01 percent in December from 2.24 percent in April, before rates were raised.
Research director Sally Tindall said banks had to factor in cost-of-living increases and rate hikes to determine whether a borrower could repay a loan.
“With each increase, the maximum amount people can borrow from the bank is reduced because the person will be paying more of their salary to the bank in interest,” he told Daily Mail Australia.
The Reserve Bank’s eight rate hikes since May have seen repayments on an average $600,000 mortgage, with Commonwealth Bank, Westpac, ANZ and NAB, rise $934, or 40.8 percent, to $3,225 from $ 2,291.
RateCity’s director of research, Sally Tindall, said banks had to factor in cost-of-living increases and rate hikes to determine whether a borrower could repay a loan.
It has also severely reduced the debt capacity of a couple earning $138,045 between them, with one spouse earning the median full-time salary of $92,030 and the other working part-time and taking home $46,015 to raise two children.
This pair in April could borrow $878,400 but the eighth RBA rate hike has brought this down by $193,700 to $684,700.
This meant that a couple, with a 20 percent deposit, who was able to buy a $1.098 million home in April, could now only borrow for an $855,875 home.
A single person earning $92,030 has seen their borrowing capacity drop by 20.3% since the rate hike, while a couple earning $138,045 has seen the amount they can borrow drop by 22 %.
This reduced creditworthiness has caused the median home price in Sydney in 2022 to fall by 11.9% to $1.243 billion.
ANZ expects three more rate hikes by May 2023, but warned there could be even more hikes next year if rising wages worsen inflation and kill off any prospect of any rate cuts by the end of 2024.
ANZ expects Australian house prices to fall 18 per cent from the peak in 2022 to the trough in late 2023.
This would mean a plummet to $255,053 in Sydney’s median home from April’s level of $1.417 million.
Distressed borrowers who are forced to sell, who applied for a loan more recently when rates were low, could find themselves owing the bank more than their home is worth, a situation known as negative equity.
ANZ, like Westpac, expects the RBA cash rate to rise a further three times in February, March and May to an 11-year high of 3.85 percent.
Reserve Bank interest rates since May have risen by three percentage points, the most severe increase on a calendar since a target cash rate was published in January 1990 (a chart from AMP Capital is shown here).
ANZ expects the Reserve Bank’s cash rate to rise three more times in February, March and May to an 11-year high of 3.85 percent. But economists Madeline Dunk and Adelaide Timbrell said high wage growth could worsen inflation and see more rate hikes (pictured, houses under construction in Ipswich)
ANZ said a rate cut would be unlikely until the end of 2024, with inflation at a 32-year high of 7.3 percent and more than double the RBA’s target of 2 to 3 percent.
They warned of even higher rates if wage growth worsens inflation, with ANZ expecting wage levels to rise 4.3 percent next year for the first time since 2008.
“If wages accelerate significantly, the RBA may need to push the cash rate above 3.85 percent,” the ANZ economists said.
“We don’t expect rate cuts until the end of 2024.”
Ms Tindall said more rate increases would mean more property price drops.
“We’ve already seen property price declines across the country, a trend that’s likely to continue into the next year as people’s buying budgets shrink further,” he said.
However, price drops will not necessarily make it easier for first-time homebuyers to enter the real estate market.
“These buyers will have to pass the banks’ serviceability tests at significantly higher rates, which is not easy to do in a rising rate environment,” said Ms Tindall.
Lenders, under Australian Prudential Regulation Authority rules, must model a potential borrower’s ability to cope to three percentage points.
But since May, the RBA cash rate has risen 300 basis points.
This was the largest increase in a calendar year since the Reserve Bank began publishing a target cash rate in January 1990.