The Sydney Morning Herald reported on April 19 that home buyers could face higher house prices and stiffer competition if they want to get more money through interest rate cuts.
Many potential homebuyers are struggling with whether they should buy now or wait until interest rates are cut. While they may get lower mortgage payments at that time, they will face higher home prices.
First-time buyers may also have to pay exorbitant rents during this period. While waiting may mean being able to have more budget in an auction, analysis by comparison platform Canstar shows that not everyone gets a head start.
They may also need to save more money for a down payment on a larger loan.
(Image source: The Sydney Morning Herald)
Canstar's analysis shows that Melbourne homebuyers could end up in a better position if they wait. For example, if one of the spouses earns average income and the other earns half of the average income, they can now afford to buy a home at the median price in Melbourne and have $4,000 left.
By the end of 2025, assuming the RBA cuts rates by 0.25% five times, they will have more money left. If house prices rise by 5% by the end of next year, they will lead by about $60,000. If house prices rise by 9%, as some forecasts, the gap will close to about $29,000.
Melbourne home buyers' borrowing capacity affected by interest rate cuts (Credit: The Sydney Morning Herald)
In Sydney, whether house prices are up 5%, 7% or 9%, buyers can't afford to buy a median home now or after a rate cut. In any case, they would have a shortfall of about $300,000.
In Brisbane, if a couple earns 1.5 times the average income, they are now having a hard time affording a median-priced home, but they will be lucky if house prices only rise by 5 or 7 per cent.
In Perth, the same couple can afford typical housing now or after a rate cut.
Sydney homebuyers' borrowing capacity affected by interest rate cuts (Credit: Sydney Morning Herald)
Canstar Group chief executive officer Steve Mickenbecker said the figures reflected the difficulties first-time buyers face when trying to enter the market.
"First-time home buyers face the full risk of rising home prices, and investors, unlike larger home buyers, can make decisions knowing that their existing properties may also benefit from rising home prices. ”
"Rising house prices mean that first-time homebuyers who hold off on buying a home before the rate cut, although they can afford it after the rate cut, will also have to save for a larger down payment and find themselves having to repay a larger loan. ”
Mickenbecker said that if home prices don't rise much, waiting could be advantageous, but if home prices jump, it could leave first-time buyers further behind.
"Unfortunately for single home buyers, at current interest rate levels, they can't afford to repay a loan to a median-priced home, and a rate cut is unlikely to help enough. ”
(Image source: The Sydney Morning Herald)
Eliza Owen, head of research at CoreLogic Australia, said in some cases it may be beneficial to wait for borrowing capacity to improve, but trying to wait for the best moment is an imprecise science.
"One of the things that always comes to mind when trying to time the market is that there are trade-offs, and there are always trade-offs. ”
Owen said a rate cut could boost buyer activity, increase competition for each property and put demand pressure on the market, potentially pushing up home prices.
Waiting for an interest rate cut to buy a home is more likely to benefit first-time buyers who don't need to pay rent, and that the disadvantages of waiting may outweigh the benefits if potential buyers have to pay unaffordable rent, she said.
(Image source: Internet)
Shane Oliver, chief economist at AMP, believes that trying to find the right time to buy a home is rarely worth it. Instead, homebuyers should buy a home when they can afford it.
"The risk is that it may not be worth the wait. If you think we're going to be in a deep recession...... When interest rates are cut, house prices will fall anyway, so you have to wait. "But if you assume that there is no recession and that the housing market continues to be tight, then interest rates are likely to come down and house prices will have to rise at a faster rate than they currently have. The money you save while you wait will be wiped out by rising home values. ”
(Image source: Internet)
Matthew Hassan, senior economist at Westpac, said it was more effective to focus on periods of sluggish demand from homebuyers than to wait for an increase in borrowing capacity, which is almost universal.
"If you want to choose the right moment, all you want is a buyer's market. You'll want to choose properties that haven't been sold yet, as there may not be as many buyers as there aren't many buyers at this time. ”
"I'm going to take that approach and not try to outperform everyone else in terms of interest rates. ”