How Borrowing Capacity Shifts The Housing Market

Interest rates climb, the headlines get louder, and suddenly everyone is sure the property market is about to fall apart. We take a calmer, more practical look at what actually changes when borrowing capacity tightens and negative gearing rules shift, because the impact is never “the whole market” all at once. Some locations get hit hard, some stall, and some affordable suburbs can stay under pressure simply because that’s where the largest pool of buyers can still transact.

We break down the mechanics of borrowing power and why serviceability matters more than opinions. As rates rise, budgets shrink, and if negative gearing benefits are removed from bank calculators, borrowing capacity could drop sharply for many buyers. That does not erase demand, it redirects it. More people compete in lower quartile markets, first home buyers dominate the affordable bracket, and the higher quartile becomes more sensitive to uncertainty because buyers there sit closer to their lending ceiling.

We also connect the dots on rental yields, vacancy rates, and what happens when investor participation changes. With vacancies tightening across many cities, rental income growth becomes more likely, and if fewer everyday investors enter the market, tenants can feel the squeeze through higher rents. Finally, we talk strategy: choosing the right location and the right asset type, avoiding the trap of buying a poor-quality property for a tax outcome, and looking for undervalued markets that have lagged their long-term performance where the next growth cycle can start.

If you’re trying to decide where to buy, what to buy, and how to stay confident when sentiment is negative, hit subscribe, share this with a friend who’s stuck in headline panic, and leave a review with the market you want us to break down next.

Transcript

Why Strategy Matters More Now

SPEAKER_00 0:00

Interest rates are rising, negative gearing has been changed, and this means that affordable locations are going to see more pressure. Now more than ever, your strategy matters. Where you buy and what you buy are going to be crucial for you to continue building wealth. There is a massive amount of negative sentiment out there right now, with fuel costs rising, interest rates rising, and budget changes. Mainstream media are fantastic at spreading doom and gloom and creating fear. The same old narrative that has been happening for decades continues on that the property market is going to crash. Some marketplaces are going to be 100% affected by these changes, while other marketplaces are going to see pressure and growth in getting the location and getting the asset type right is crucial. In this episode today, we're going to be breaking down a number of different factors as to where we're going to see price growth and what implications are in play right now.

Borrowing Capacity Gets Tighter

SPEAKER_00 1:00

And the first thing we're going to be talking about is borrowing capacity. And borrowing capacity is going to be negatively affected over the next 12 months. And there's a couple of reasons why. One of them is we have seen this year already some rate rises. With rate rises, interest rates increase, and that negatively affects our borrowing capacity. So right now, if you're trying to purchase and your borrowing capacity is limited, then it's going to get tighter. And that's why getting in within your budget now is crucial because affordable locations will continue to rise. And if on the flip side your borrowing capacity is decreasing, you could be priced out of the market. And we've seen this already with some people where they could have purchased 12 months ago, they didn't. They're going to pay 150K more now. But then on the flip side, they don't have some of the benefits through negative gearing now. On top of that, with the budget announcements last week, we now know that in the future borrowing capacity is going to be affected also. We don't know when that's going to take place. We've got the proposals from the government. It needs to come into effect and into legislation. And then what we will see is the banks roll out and update their borrowing capacity. We're going to expect to see probably a 30 to a 40% hit in terms of borrowing capacity once they remove negative gearing from their calculators. So it's going to be interesting to see how that unfolds. And once the legislation takes effect, will the banks implement it straight away or will they wait for the first of July next year? If we're looking at the average life of a loan, 25 to 30 years, they might implement those changes sooner and not wait for the first of July 2027. So there's some things that we need to factor into the equation when we're purchasing. But the higher quartile markets where we're looking sub, I should say, where we're looking above $1 million, they're going to be more affected because they're closer towards their borrowing capacity ceiling. However, those more affordable locations, more people are going to be getting pushed into those affordable locations. And in those affordable locations, that's going to create pressure. There's going to be more people transacting in that affordable bracket. And that's something we focus on as a business. We want to go into those affordable areas because that's where the majority of people can afford. And that is going to push prices higher. The government's out here saying that, well, these changes are going to benefit first home buyers, but it's actually just going to add further pressure in that marketplace where a lot of first home buyers are transacting. Now, in those lower quartile marketplaces where there is more affordability, like I mentioned, there's those first home buyers there and essential owner-occupied purchases. So that is simply where some people can afford to purchase and they don't have the luxury where they're going into the high end of the market above 1 million, above 2 million. So that's something to really think about with some of these changes. And typically the the rents in that lower end is where people are transitioning from renting into those same similar marketplaces that are affordable. Whereas the higher quartile is higher income earners, they're they're upgraders, they have a lot of discretionary spending. Now, with that, that is where those marketplaces are more affected. So we typically see in times of uncertainty where there's negative sentiment, the top end is affected, but it doesn't mean that that more affordable lower quartile is affected. And this is going to be crucial over the next couple of years. Everyone thinks that the whole marketplace is going to crash, but affordable marketplaces will continue to receive pressure.

Yields Vacancy Rates And Rent Growth

SPEAKER_00 5:22

Another one that we want to think about is yields and yields in those locations. Naturally, what's going to happen now because of the negative gearing benefits that we see going, people are going to chase those higher yields. So again, it's going to be going back towards the lower quartile, where typically rents are higher or rental yields are higher based on that purchase price. This is going to dissentivise some investors from entering the market. It's going to be our typical mom and dad investors. It's not going to be our sophisticated investors because right now they're going to see opportunity while there's less buyers because some people are acting in fear. They're going to get in now, take advantage, and know that rental income growth is going to take place. They are already chronically low from a vacancy rate perspective. Seven out of the eight capital cities have reduced over the last 12 months in terms of their vacancy rate. With vacancy rates dropping, this is a forward indicator for rental income growth. So we're going to start to see that take place. And again, the government's positioning that it's going to be better for tenants and first home buyers. This will negatively impact tenants. Rents are going to rise. Now, what we will also see in specific locations is some areas, people will start to focus on those high-yielding properties. And that could look like a unit, a townhouse, a villa. So that's something that may shift. And it's going to depend upon budgets as well. If someone had a 650K budget and with the negative gearing changes, it reduces to 450,500. They're going to be priced into a different marketplace and a different asset type. We will see some people still find a solution in their budget and get into those marketplaces. So there's going to be added pressure to some of those different asset classes in the right locations.

Location And Asset Selection Rules

SPEAKER_00 7:30

Now, the next thing we're going to be talking about is asset selection and the location selection. So what has taken place over the last five years is we've seen some locations perform very strongly where other locations have underperformed to their long-term performance. Okay. And this is where the opportunity is. Some people will follow where the growth has been had, whereas others will follow where the growth hasn't taken place, understanding that over time, if we can see that the long-term average is high, but the last five years is under that long-term average, we know it's going to overperform and those marketplaces are undervalued. And it is crucial right now to really analyze those locations and get into locations early in their growth cycle that haven't done 100%, 150% over the last five years. This is going to be crucial to make sure you get into that area that is still going to grow in value despite the complications and the negative sentiment out there right now. One of those locations that is chronically undersupplied right now is the Melbourne marketplace. Right now, you can get many properties, sub 650 on a large piece of land that is a house. So there is massive value there right now. It has not performed well over the last five years. But if we look over the last 30 years, as per totality, it has been one of the top performers in the country. We know that area is undervalued. It's undervalued in comparison to Sydney. It hasn't performed well over the last five years and is going to grow strongly over the next five. And primarily, what we want to focus on is capital growth. Negative gearing is just a benefit, and it's a secondary benefit to the overall overarching strategy that you must get capital growth. Does not make sense to buy a shitty asset that doesn't grow in value just so you can get some benefits from a cash flow point of view. You still need to go out there and buy in an area prime for growth. Now, another metric that you want to be focusing on right now with these affordable marketplaces is the income levels versus property prices. There's many locations in that affordable quartile, yet the income on the back of that is quite strong. So we know that they're undervalued right now and they're well below their borrowing capacity ceiling. So there's a lot of room for growth in those locations. Right now, like I said, it's so important to get that location right. Those affordable locations are going to be crucial to get into and get that performance moving forward. We're going to see that capital growth. We're going to see rental income growth as there are less investors within the marketplace. Right

The Opportunity Window And Next Steps

SPEAKER_00 10:41

now, the sophisticated investors, the top 1% of investors, are looking at this window right now as a solid opportunity to get in while some people are still getting their head around the budget changes, thinking it's going to stop price growth. It's a similar time frame right now to COVID where everyone was freaking out, no one was taking action. And then off the back of that, there was a massive run. There was a nationwide boom at that time. But again, what's different this time is that location piece is going to matter more than ever. The higher quartile, yes, there's going to be some correction in some locations, but that lower quartile is going to continue to have momentum, have people transacting in it, and the pressure within that lower quartile is only going to increase more. We've got the first home buyer incentives in that marketplace, and we will see them dominate those marketplaces. They will absorb stock, vacancy rates will drop, rents will rise, and it goes on in a cycle like that. If you're looking to purchase now or you've been thinking of purchasing, but you don't have the confidence on where to target, what to target, then reach out, let's book in a call, and we can build out a strategy to help you build wealth through property and have the confidence to keep taking action right now and reap the rewards whilst everyone is acting in fear. Thanks for listening, and we'll see you on the next one.