Home buyers with pre-approved loans are rushing to purchase at auction before their borrowing power takes another potential hit, driving up competition for properties going under the hammer.
Strong auction clearance rates in Sydney and Melbourne are being driven by growing buyer competition for the limited number of homes for sale, experts say, as home hunters race to transact before their 90-day pre-approval expires.
Competition has been on the rise for homes going under the hammer. Credit: Peter Rae
Fear of another cash rate hike and concern about rising prices and rents, also have buyers wanting to transact sooner rather than later.
Sydney and Melbourne recorded preliminary auction clearance rates of 77.2 per cent and 74.3 per cent, respectively, on Saturday, Domain Group data shows.
It’s the fourth consecutive weekend in Sydney, and seventh in Melbourne, that the preliminary rate has been above 70 per cent, and comes after the cities recorded respective monthly clearance rates of 67.9 per cent and 67.3 per cent in April.
An auction clearance rate of 70 per cent is reflective of a rising market, and usually correlates with price growth of about 10 per cent, according to Domain. While a rate of 60 per cent is indicative of a balanced market.
AMP Capital chief economist Dr Shane Oliver said it was surprising to see high clearance rates in both cities, which had flowed through to higher prices in recent months, after 11 cash rate hikes.
When interest rates climbed in the past, buyers pulled back from the market as their borrowing power fell, and most stayed out until rates stabilised or dropped, Oliver said.
“The market is doing the exact opposite of what it usually does,” he said, despite buyers facing an almost 30 per cent drop in borrowing capacity.
A number of factors were contributing to higher clearance rates, Oliver said. The shock of rising rates had eased, while fear about rising prices and rents – which was prompting some tenants to try purchase – was driving up buyer demand at a time of low supply, and stronger than expected migration.
Rising rents have prompted some tenants to try to purchase a home.Credit: Dion Georgopoulos
AMP Capital has forecast price growth to be flat or slightly up by the end of the year, recently revising up its forecasts, as many have, from previous expectations for a 7 per cent drop. Prices are then tipped to lift 5 per cent next year.
However, there were risks ahead for buyers, Oliver said, as prices could fall again as pressure mounts from any further rate rises.
Melbourne mortgage broker Chris Foster Ramsay, director of Foster Ramsay Finance, said buyers with pre-approved loans were keen to get into the market before their borrowing power fell further, which was contributing to stronger buyer demand and clearance rates.
“They are trying to get in before their 90-day pre-approval expires,” Foster Ramsay said. “But [the strong clearance rate] is also a low [housing] stock issue.”
Some banks were honouring pre-approved amounts if rates climbed further before a buyer purchased, particularly if buyers were making a deal immediately after their pre-approval lapsed, Foster Ramsay said. However, others were not.
“Smaller lenders are wanting to reconfirm buyers can repay their loan, and larger lenders, they are a bit more open to longer pre-approval periods,” he said.
Sydney mortgage broker Anthony Landahl, managing director of Equilibria Finance, said many pre-approved buyers were still keen to transact, but were having to compromise due to reduced borrowing capacity and fewer homes to choose from.
“They’ve got to recalibrate their needs and what they can buy and afford,” Landahl said. “The market has come off a bit [since the peak] so buyers are quite active once they understand what they’re purchasing capacity is.”
“They’re quite keen to get into the market, but supply is limited so that’s helping to prop up the market.”
“There are people who are renting at the moment, who are looking at their rising rent saying ‘should we be looking to buy’?”
Though interest rates could rise again, Landahl said many buyers were factoring that in before borrowing or getting pre-approval for a loan.
Even so, those with pre-approval could still face a reassessment before the 90 days is up, depending on the lender, said Loan Market Ryde’s James Keillor.
Many buyers who planned to stretch themselves to buy, were rethinking their strategies as interest rates were expected to continue to rise, Keillor said.
“The conversations we’re having now isn’t how much you could borrow, it’s how much you should borrow.”