Auction results still solid, but first home owners are hurting as rates rise

First home owners are experiencing considerable financial stress due to interest rates rising more quickly than expected and are devoting 45% of their income to mortgage repayments, an industry expert has said.

But while demand from first home owners is beginning to wane as interest rates rise and prices continue to grow, upgraders and investors aren’t backing away, with auction results solid in the country’s major markets.

Martin North, executive director industry group, Fujitsu Australia & New Zealand, says first home owners are now spending on average about 45% of their income towards repayments, compared to established owners who are spending between 25-30%. The figure was gained by the company while completing its own research work.

North also says rising interest rates are scaring away prospective buyers, with many now unwilling to enter the market despite investigating properties within the last 12 months.

“You have to remember that first home buyers will normally reach as far as they can because they have to in order to get into the market, but they’ve never quite had to stretch themselves as much as they are now. In fact, 30% of the people who have tried to enter the market now believe it is beyond their reach.”

North says this is because of two reasons. The first is rising interest rates, with many first home owners underestimating how quickly the cash rate would rise, with the second being rising housing prices which push up the size of the average loan.

“You put those factors together, and you have people unwilling to enter the market and existing home buyers going to be in difficulty. I think one of the major impacts of this is that first home owners are probably going to refinance.”

“Another factor is that first home buyers will sell, but I don’t think that’s going to see defaults and it won’t cause prices to rise. There is still a significant amount of demand, which will give first home owners a small gain if they sell as they will have equity.”

North says any prospective first home buyers must view the current property environment with prejudice, and scrutinise their finances before making such a large commitment.

“These first time owners must be extremely careful. They must have a clear view of what they can afford, and if they are getting into difficulty or making refinancing decisions, they can’t just use credit cards to pay the bills. The sooner they speak to their bank, the better.”

Meanwhile, the auction market remains strong as investors and upgraders scout for deals. In Melbourne, currently the nation’s strongest market, new figures from the Real Estate Institute of Victoria revealed the median price of houses sold at auction rose by 4.4% to $720,000.

There were 875 auctions reported, out of which 739 sold resulting in a clearance rate of 84%. REIV chief executive Enzo Raimondo remarked in a statement that “there have now been twice as many homes sold by auction as this time in 2009”.

The total value of both auction and private sales reached $930 million. While next weekend will only see 476 auctions due to the Anzac Day public holiday, in two weeks that number will lift to 840.

In Sydney, there were 308 properties put up for auction with 232 sold, resulting in a clearance rate of 71%. Total sales reached $186 million.

In Brisbane, just 25 properties were put on the market, with only six selling resulting in a clearance rate of 23%. In Adelaide, 21 properties were put up for auction, with only 13 selling with a clearance rate of 59%.