With a modest cut of 0.25% in the cash rate in February, many young buyers have been asking why interest rates have been so high.
To many older Australians the current cash rate of 4.1% represents incredibly cheap money. Many will recall the days when banks charged up to 17% in the early 90s.
Those days were different, of course. Properties cost nothing like they do today. And while rates are low-ish today, the overall cost of a home takes a much larger slice of the weekly wage packet than it did 20 or 30 years ago.
But let’s explain why rates remain challenging for first homebuyers.
Interest rates are set by the Reserve Bank of Australia (RBA) whose primary responsibility is the financial stability of the nation.
When inflation looms – just as it did in the immediate months after Covid in 2022 – the RBA uses interest rates to dampen price rises. Effectively, it aims to curb spending and cool the economy, ultimately returning inflation to its target band of 2%-3%.
This action has significant consequences for the property market, where borrowing is fundamental.
Impact on Buyer Demand and Affordability
Increased interest rates directly impact borrowing costs, making mortgages more expensive. This reduces borrowing capacity, forcing potential buyers to reassess their budgets and often postpone or abandon purchase plans.
Navigating this changing landscape can be complex, and seeking expert advice from those who’ve bought property before or have professional experience in the industry, such as real estate agents, is advisable.
Impact on Existing Homeowners
Existing homeowners with variable-rate mortgages are particularly vulnerable to rising interest rates.
Increased mortgage repayments strain household budgets, often necessitating cuts in discretionary spending. If you’re under significant financial pressure, the risk of mortgage stress and potential forced sales increases.
Investor Sentiment and Activity
Rising interest rates also influence investor behaviour. Higher borrowing costs diminish the attractiveness of property investment, potentially decreasing investor activity. This can further cool the market and impact rental yields.
So, why have most markets in Australia not seen a fall in prices because of rates?
It comes down to supply. High immigration intakes and pent-up demand have seen significant price increases in Perth, Adelaide and Brisbane. Sydney has also continued a growth trajectory. So high rates do not automatically mean lower prices.
Are the days of high interest rates over?
For the time being, probably yes.
Australia’s inflation rate is now 2.2% – well inside the target band set by the RBA. It is also substantially below the peak of post-Covid break-out inflation, which hit 7.8% in Q4 of 2022.
Now, as a first-time buyer, you should be able to view the interest rate environment as stable at worst and falling at best. There are lots of factors that come into play, however.
Therefore, we recommend you avoid distraction and focus on the fundamentals:
- Saving for your deposit.
- Researching homes in your target area.
- Talking to local real estate agents about local property trends.
- Finding a mortgage broker, who can offer a variety of mortgage deals and get you pre-approved when you are ready to buy.
- Commissioning a solicitor for your conveyancing needs.