Where Are All The First-Home Buyers Going?

For those looking to enter the property market for the first time, the bar has has never been higher amid skyrocketing prices, hefty deposit hurdles and tight borrowing rules.

National home prices hit a new record high in February according to PropTrack, with values up 6% over the past year.

For those not already in the market, saving for a deposit feels increasingly out of reach as rising home prices, rents and living costs outpace wages, and at the same time higher interest rates have crushed borrowing power.

According to the Australian Bureau of Statistics, first-home buyer loans fell 6.9% in January – following an 8.9% fall in December – to reach the lowest number of loans since February 2023.

PropTrack senior economist Anne Flaherty said first-home buyer numbers have dwindled significantly since interest rates began to rise.

“Back in 2020, 2021, we saw much higher levels of first-home buyer activity off the back of much lower interest rates,” she said. “Now what we’ve seen is that first-home buyer activity has really stabilised.”

With higher interest rates significantly diminishing how much a typical buyer can borrow, it’s never been tougher to be a first-home buyer, Ms Flaherty said.

“Since interest rates started rising, that amount that can be borrowed has fallen by 30%, but property prices are actually sitting at peaks in most markets,” she said. “It’s that deposit hurdle that’s preventing a lot of them from buying.”

Saving for a home deposit is becoming harder as property prices rise and borrowing power falls. Picture: Getty

But could things be about to change?

Ms Flaherty said a move by the Reserve Bank to cut rates could reignite confidence in first-home buyers.

“We had a period where interest rates rose at one of the most rapid rates we’ve seen in Australia’s history and that was a real blow to confidence,” she said.

“But if it looks as though we’re entering a period where interest rates are going to remain stable or even decrease, that’s going to increase the confidence of buyers.”

Rental crisis could drive more into homeownership

For those with the ability to do so, Ms Flaherty said the rental affordability crisis is likely to push more renters into homeownership “purely because conditions in the rental market are so tough at the moment”.

“We actually might see first-home buyer activity pick up this year,” she said.

Long Iines at a rental inspection in Sydney as supply fails to keep up with demand. Picture: Sam Ruttyn

First-home buyer Mike Nykanen is paying “pretty substantial” rent in Sydney’s inner west and figures it’s best to purchase his own place.

“I’m not going to get any younger and I don’t think rental prices are going to drop anytime soon,” the 27-year-old told realestate.com.au.

“It doesn’t make much sense that I could pay more to rent than to just have a property on my own.”

The account manager has been searching for six months and has roughly $80,000 for a deposit, potentially helped by the government’s First Home Guarantee.

Sydney renter Mike Nykanen plans to purchase an apartment to escape the competitive rental market. Picture: Supplied

He is flexible with location, as long as the property is in the $450,000-$500,000 range with good road connections and local cafes.

“I work long hours and just want to have a place that’s conveniently located and not too far from anything,” he said.

“I’m looking around Potts Point, maybe a studio for now, and then I’ll just build up equity and try and get another property within the year.

“I’m not going to overindulge in spending because I’ve never had the experience of owning a property. I just want to work small and start to gain that experience and build up as I go.”

A compromise on location

With many buyers priced out of their top choice, Belle Property Ashfield principal Tommy Ajaka said a spillover effect was taking place.

By moving to the next suburb, he said first-home buyers were still able to live close to their desired location while living the lifestyle they crave.

Units in Sydney’s Ashfield have good connectivity to the CBD but still offer relative affordability. Picture: realestate.com.au/buy

In Sydney’s inner west, Mr Ajaka said first-home buyer interest is focused on affordable apartments priced from around $650,0000.

“The Ashfield region is a bit more affordable than Stanmore and Petersham, for example,” he said.

“People tend to come into our area because of that affordability, and also due to transport and restaurants – it’s the lifestyle.”

Chantelle Rangel, broker at Mortgage Choice Marrickville agrees borrowers are focusing on more affordable areas to gain a foothold into the market, and also compromising on property type.

She said first-home buyers are adopting the mindset that their first purchase may not be their ‘forever home’.

“A lot of them are looking to purchase their first property, live in it for a year or so and then in future convert it into an investment and then buy another property,” Ms Rangel said.

“It’s just a short term means to get into the property market and get some equity.”

In order to obtain a loan of up to $550,000, Ms Rangel said a first-home buyer typically needs a $100,000 salary. This allows for monthly expenses of $2,000 and no other liabilities.

However, eligible buyers could obtain pre-approval for a purchase price of up to $600,000 based on a 5% to 15% deposit, plus about $3,000 for fee, she said.

Under the First Home Guarantee initiative, eligible first home buyers can buy a property with as little as a 5% deposit, without paying lenders mortgage insurance.

Usually, home buyers with less than a 20% deposit must pay LMI.

Ms Rangel said talking to your broker will enable you to better understand your borrowing capacity, as everyone’s situation is different.

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