Why it’s getting harder to save a deposit despite falling prices

Property prices may be falling across most of the country, but for many, it’s getting even harder to save a deposit.

Increasing rents, higher interest rates and cost-of-living pressures are creating a perfect storm for households, and wages aren’t keeping up.

The Australian Bureau of Statistics last week released the quarterly wage price index, which showed wages growth of 2.6% over the year to June.

Michelle Marquardt, head of prices statistics at the ABS, said it’s the third straight quarter of consistent wage growth.

“This is the highest annual rate of wages growth since September 2014,” Ms Marquardt said.

So, why doesn’t it feel like it?

Inflation outpacing wages

While wages are on the up, the rate of growth is still lagging well behind the rising cost of living.

Over the year to June, inflation surged 6.1% and is projected to reach 7.75% by the end of 2022, according to both the RBA and federal Treasury.

For many hopeful buyers, this means any gains in their pay cheque isn’t translating to savings that could be put towards a home deposit, PropTrack economist Angus Moore said.

“So, in what we call real terms, which is after adjusting for inflation, wages are actually falling at the moment,” Mr Moore told Mortgage Choice.

Rising interest rates also impact how much people can borrow.

“A 0.5 percentage point increase in mortgage rates from where they are currently would reduce borrowing capacity by about 5%,” Mr Moore said.

So if someone was looking to borrow $500,000 and interest rates went up another 50 basis points next month (or half a percentage point) their borrowing capacity could be reduced to $475,000.

Of course, there are many other factors that impact a person’s borrowing capacity beyond interest rates alone.

Exactly how high interest rates will rise is one of the great unknowns.

Paul Riley, executive of NAB’s Everyday Banking division, said rising interest rates are also something that first-time buyers may have never experienced.

“It’s no wonder that it may feel like an uncertain time with moving goalposts,” Mr Riley said.

“My advice is to look at the forward prediction by leading economists – right now [NAB is] expecting the cash rate at 2.85% by the end of 2022 – so if people have that in mind when they are saving that’ll definitely help.

‘’While the current cost-of-living pressures certainly aren’t helping people who are trying to save for a house deposit, we also know that this journey can take time so the sooner people get a plan in place, the better.”

More stock expected to hit the market

What may provide some relief for buyers is the influx of properties that typically hit the market during spring.

Mr Moore said spring is traditionally the seasonal peak for housing market activity, which will create more competition and greater opportunity for buyers.

“That’s all good news for buyers because it means you have more to choose from and can view more properties,” he said.

Mr Moore said the rise in interest rates will limit how much people can borrow, which is likely to put downward pressure on house prices.

“I suppose the good news for prospective buyers on that front is that property prices have actually come off a little bit in recent months.

“So that may mean a smaller deposit you need to save now. The change is relatively small, but it’s still helping, particularly compared to say 2021 when we saw prices grow very, very quickly.”

In July home prices across Australia fell 0.43% and are now 1.66% below the March peak. Perth and Adelaide were the only capital cities to record price increases during the month.

Mr Moore said that shift in prices as well as stock being listed for longer is seeing a little less competition for any given property.

“There’s more options, more chances to find what you’re looking for, and it’s a little bit less competitive for buyers than it was last year.”