You wouldn’t go shopping without your wallet, and by the same token, you shouldn’t go house hunting without knowing what you can afford to buy.
That’s the message from expert property buyers to house hunters trying to buy a home while the market transitions from a downturn to a recovery – conditions we’ve seen emerging across Australia’s capital cities.
Domain’s latest House Price Report has revealed that house prices rose across the combined capitals last quarter for the first time in a year.
“The crucial shift in market conditions is being led by our larger capital cities – particularly Sydney, growing for the first time in a year,” said Domain chief of research and economics Dr Nicola Powell.
“It is also likely that our large capitals will lead the way into recovery as they have historically, given they hit a peak price earlier and fell faster.”
House prices increased the most in Sydney, up 1.3 per cent. Perth house prices rose 1.2 per cent to reach a new record high, while Adelaide also set a new price record with a 0.4 per cent gain. Prices remained stable in Melbourne and Brisbane, indicating these cities may be at or close to the bottom of the price cycle.
Auction clearance rates – a leading indicator for price movements – have been rising steadily over recent months too, with the low volume of new listings coming onto the market putting a floor under prices as buyers compete for the limited number of homes available.
A clearance rate above 60 per cent usually indicates a balanced market, while a rate above 70 per cent is correlated with price growth. Sydney’s weekly clearance rate has exceeded 70 per cent three times since January, while Melbourne clearance rates have mostly stayed in the mid to high 60s this year, but reached 77 per cent in the last week of April.
Demand from buyers has also increased across all capitals this year, after falling throughout 2022 as house hunters held back in uncertain economic conditions. The level of demand is about where it was in early 2020, Domain data shows.
“A definite shift over the past four to six weeks is that the buyers are back and they’re confident,” said Melbourne buyer’s advocate Wendy Chamberlain. “There are buyers out there wanting to buy but there’s just a shortage of stock.”
After rising again in May, the cash rate target is now about where the Reserve Bank of Australia (RBA) forecasts it needs to be to bring inflation back to target within a few years.
While it’s still possible the RBA could raise rates again this year, it’s clear that we’re getting to the end of the tightening cycle, giving buyers a little bit more certainty around how much their repayments could change in the near future.
Add into the mix the pressures of population growth and it appears buyers looking to purchase a home this year could be entering a rising market.
What you need to do before going house hunting
In a changing market, a simple mistake buyers can make is spending time inspecting properties they can’t afford, let alone house hunting without actually knowing their borrowing power.
“The most important thing you need to do to get ready is to understand what your budget is,” says Nick Viner, principal buyer’s agent at Buyer’s Domain. “For that, you need to speak to a mortgage broker or bank to understand how much money you can borrow.”
Knowing your borrowing capacity is crucial, especially for first-home buyers, as the amount you will be able to spend on a property will depend on how much a bank will be willing to lend you.
Your borrowing power will also help you determine where you can afford to buy, so you can narrow your search to areas and properties that fit your budget.
“There’s not really too much point spending much time looking before you’ve got the pre-approval in place,” Viner says. “How annoying and frustrating would it be to start looking, find a property you genuinely love and are interested in, and it’s a struggle to get the finance on time and you miss out.”
Chamberlain agrees. “As soon as you think you’re going to be looking, start getting your pre-approval organised,” she says.
Borrowing capacities have fallen by about 30 per cent since interest rates started increasing in May 2022, according to the RBA’s most recent Financial Stability Review, highlighting the importance of knowing your borrowing capacity in a changing market. Individual circumstances vary, so it’s important to have a conversation with a broker or lender to determine where you stand.
Domain Home Loans chief executive Kareene Koh says home loan pre-approval, which typically lasts 90 days but can vary by lender, allows buyers to start their property search with the confidence that they can move forward when they find a suitable property.
“In a rising interest rate environment, it is good to ask what your repayments and borrowing power would be if rates increase during that period so you can plan accordingly as a pre-approval is a best indication only,” she says.
Buyers with pre-approval can still shop around and compare loans and lenders once their offer has been accepted or they have bought a home at auction.
“The details of your loan and final approval will not be confirmed until you have exchanged contracts and move to an unconditional approval stage of the application process,” Koh says. “Just because you get a pre-approval with one bank does not mean that you have to use them when you have actually made a purchase if someone else offers you a better deal.”
With interest rates potentially stabilising and property prices starting to recover as more buyers compete for the low volume of properties available, buyers who are simply passively watching the market rather than proactively preparing to buy could miss opportunities in front of them.
“If you aren’t ready to go, you will miss out,” Chamberlain says. “When properties come up, if you’re not ready, the vendor is going to sell it to someone else.”
When prices rise, buyers’ ideal properties become harder to purchase and more compromises need to be made. This problem can be compounded if buyers who aren’t certain about their borrowing capacity waste time searching in areas that their budget won’t cover.
On the other hand, if you have a clear idea of your buying power, either through home loan pre-approval or initial conversations with a mortgage broker or lender, you will be able to confidently search for properties in your price range, saving time and getting you into the property you want sooner.
article by domain.com.au