Buffers and rates shrank borrowing capacity ‘significantly’: Domain

Domain’s Forecast Report Financial Year 2023–24 indicated that some borrowers may find it difficult to purchase a property due to the Reserve Bank of Australia (RBA) lifting interest rates by 400 bps since May 2022 and serviceability buffers causing the maximum borrowing capacity to “shrink significantly”.

However, the report noted that it may steer demand to the affordable end of the housing market, whether that is more affordable locations or cheaper property types.

As economic conditions have changed rapidly over recent months, which could equally be the case in the next 12 months, according to the report, as the market is pricing interest rate cuts from early 2024.

Should this occur, there may be an increase in borrowing/buying power, exerting upward price pressures on the housing market.

“Typically, a catalyst sparks the commencement of a price cycle, such as interest rate cuts or a favourable demand-driven policy that brings buyers to market (e.g., a first home incentive),” the report stated.

Additionally, reduced borrowing capacity could result in borrowers finding it challenging to refinance, especially for those who “overextended and bought close to the peak”.

“If this occurs, it will inevitably exert downward pressure on property prices as many try to exit the mortgage club,” the report stated.

Moreover, total supply is lower over the past year in Sydney, Melbourne, Brisbane, Adelaide, and Perth, signalling rising competition between buyers, which could help stabilise or improve prices in certain markets.

The report stated that the recent rate hikes from the RBA could be enough to “keep the pent-up supply on the sidelines” and keep prices rising.

However, should housing confidence improve, delayed decisions may present another future risk, sparking further price falls.

Housing market to have steady recovery over the next year

According to the report, the housing market will be in a “well-established, steady recovery” over the FY23–24, with house prices in Sydney, Adelaide, and Perth and unit prices in Brisbane, Adelaide, and Hobart potentially recovering from the 2022 downturn by the end of FY24.

House prices in Sydney, Adelaide, and Hobart will be the centre of positive price gains, with a slower pace of growth expected across combined regional and unit prices.

Domain’s overall house and unit price forecasts to the end of FY24:



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