Melanie Hearse - 15 Apr, 2021

Home-buyers stretch their budgets to avoid asking for more cash

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Potential home-buyers are trying to borrow as much as they can before turning up at auctions amid a rising property market to avoid missing out and having to ask for more money later.

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Real estate experts recently spoke to Domain about a trend stemming from the historically high growth in the Australian property market – values across all capital cities jumped by at least 1.4% in both city and regional areas.

Soaring demand with lower supply is seeing competition to secure a property is spiking prices and would-be homeowners continuously walking away empty-handed when properties sell well over the asking price.

In the case of auctions where homes are going significantly over the reserve price, Domain reports mortgage brokers and estate agents have seen disappointed underbidders with a limited budget go back to the bank and try to increase it for next time.

You might also like: RBA Low Rates Remain Despite Surging House Prices

More generally, it has also seen home hunters stretching further to secure pre-approval for loans at the top end of their lending ability rather than a more manageable sum in the hopes they will not need to use all of it. For others, it has meant asking family for a helping financial hand or moving further afield to more affordable locales.

One mortgage broker told Domain he had attended several auctions in Melbourne over the past couple of months that despite setting these ‘absolute maximum’ budgets, they still missed out.

He said despite setting ‘upper, upper, upper limits’ for what to bid, by sticking to them when bidding on their behalf, he left the auctions without raising his paddle once, despite the price guide suggesting the property was within their reach.

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You might also like: RBA Low Rates Remain Despite Surging House Prices

Will it last?

While the RBA has noted the cash rates are set to stay until they see inflation – tipped to be around 2024 “at the earliest” according to the RBA’s Governor Philip Lowe, they will be keeping a close eye on responsible lending.

However, they also cautioned they would clamp down on risky lending if the booming market overheated but it did not expect to lift the official cash rate until at least 2024.

“Housing markets have strengthened further, with prices rising in most markets. Housing credit growth to owner-occupiers has picked up, with strong demand from first-home buyers,” Mr Lowe noted.

“Given the environment of rising housing prices and low-interest rates, the bank will be monitoring trends in housing borrowing carefully, and it is important that lending standards are maintained.”

While this doesn’t mean large loan amounts, it will likely flag loans with small deposits and a large loan amount without a corresponding income level.

Total housing credit rose 3.8% in the year to February, Reserve Bank figures released on Wednesday show, in the strongest annual growth rate in almost two years. Domain reported CBA economist Nicolas Guesnon forecasts a 5% lift in housing credit over 2021, a level he does not believe would create concern with the regulator or the Reserve Bank.

However, when it comes to deciding how far to stretch the finances borrowers need only look back to the period following the Global Financial Crisis to proceed with careful consideration. The cash rate increased six times between October 2009 and May 2010, taking mortgage interest rates with them and catching some unawareness.

You might also like: Why didn’t the Australian housing market crash?

Words by Melanie Hearse

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