This is the eighth month in a row we have said “The Reserve Bank of Australia (RBA) has increased the cash rate”. In its final meeting for 2022, the bank increased the rate from 2.85% to 3.1% in its ongoing bid to cool rising inflation.
This is 3% higher than the start of the year, which marks the top end of where borrowers were stress tested for new home loans, meaning many homeowners will be feeling the pinch of higher repayments as they service their loans. The small reprieve being the RBA does not meet in January, so there will not be another increase for at least two months.
There has been a lot of talk around what the rising cash rate and ensuing mortgage interest rates means for people who already have a loan, but what about those who are wanting to enter the property market? Rising interest rates means a lower borrowing capacity (the amount a lender is willing to lend you) and the turbulent property market may seem a deterrent for some. However, there are a number of reasons why this could actually be a good opportunity for first-home buyers to enter the property market.
1. Falling property prices
If you’re considering buying property, you’ve probably seen the widely reported news that property prices have dropped in many areas around the country. Property insights provider CoreLogic released data showing houses in some areas in Sydney have dropped in value by up to 25% over the last year and some Melbourne suburbs dropped by nearly 15%. These were the two hardest-hit cities in the property downturn.
While this is not great news for homeowners, it can be a great opportunity for people wanting to get into the market. It means homes may be more affordable than they were a year ago. It also means we are moving toward, if not in, a buyers’ market – compared to last year’s seller’s market.
2. Increasing rents
If you’ve looked for property to rent recently, you would know competition is high, the prices are up and other applicants are offering anything from higher rent to months upfront in a bid to secure a property. According to a recent report by Domain, Australians are experiencing the longest period of rental price growth on record. Nationally, the annual change to September was 12.8%, with Brisbane experiencing the highest increase at 22%.
When you purchase your own home, you become your own landlord. Variable rates for home loans are likely to increase and decrease over time, however rents on properties tend to continue to trend upward. Buying your home to live in helps you to get out of the rising-rate environment.
3. Projected flattening of interest rates
The cash rate has increased steadily over the last eight months, and with it interest rates on home loans. The RBA has said it is open-minded about how many future rate increases it will make, however economists at the big four banks have made predictions on when it will peak – ranging from 3.1% to 3.85%. They all predict this peak will happen at some stage in 2023.
There are two potential pros for this for people looking to purchase property. Firstly, if we hit the peak in 2023, they are unlikely to experience the same turbulence homeowners experienced through 2022 with the rapidly rising rates. Secondly, the stress test applied to loan applications (where lenders test if you could afford to pay your loan if the rate was 3% higher than it is on the day you apply) means you should remain within your “comfort” range on repayments if economic factors are brought into control as projected.
4. Higher savings rates
The flip side of the rising cash rate is that the interest rate on savings accounts usually also increases. This is good news for people saving a deposit to purchase property. While we were experiencing the lowest cash rate on record, savers took a big hit where their savings were receiving very little if any interest. Now savings accounts can have interest rates over 4% (if the bank’s specified conditions are met), helping give a boost to that deposit. This combined with the decreasing property prices can put buyers in a better position to get onto the ladder.
If you’re planning on buying property, a broker can help get you on track. They can help you get your finances in order and help you understand your borrowing power so you can bid with confidence.
