Property prices may be dropping but that doesn't mean that wannabe home owners are suddenly celebrating.
Lenders are simultaneously winding back how much people can borrow for mortgages as they factor in higher interest rate repayments and cost of living pressures.
Corey Chamberlain and his partner were just told by their mortgage broker that their borrowing capacity with a smaller lender has dropped by more than 20 per cent.
That's compared with a national property price drop of just 2 per cent in the last three months.
"I'm gutted, really," Mr Chamberlain told ABC News.
The couple with a young child were first approved for a mortgage of around $975,000 in late 2021, and then again when they went back for pre-approval earlier this year.
That's when Australia's official cash rate was still at 0.1 per cent.
Since May, the Reserve Bank has been raising the cash rate to tackle surging inflation that's hitting the Australian economy.
Today, the RBA is expected to hike the cash rate again to take it to 1.85 per cent.
Banks are passing the higher cash rate onto borrowers in the form of lending rates, which is impacting the head repayments on people's loans.
In October, the regulator APRA also told the banks to raise the minimum interest rate buffer on loans from 2.5 per cent to 3 per cent.
Despite the new lending environment, the Chamberlains weren't expecting their estimated loan amount to drop down from $975,000 to below $750,000 when they went back to their broker last month.
The couple's deposit hasn't changed since late 2021 and Mr Chamberlain actually received a slight pay raise recently.
"(Our broker) was pretty open with us about saying it was all down to interest rates," Mr Chamberlain said.
"One hundred per cent, it's down to the interest rates."
The couple sold their house in the New South Wales regional city Newcastle at the end of last year, after Mr Chamberlain's job was transferred three hours drive south to Wollongong.
They've been renting there all year as they've struggled to buy a new house on their original approved limit of $975,000.
"It's just the constant battle of everything's overpriced and everything that's in the price bracket needs work done," Mr Chamberlain said.
The couple were hoping to buy a house with enough bedrooms so that they can expand their young family further. Now their loan amount is reduced, they feel even more dismayed.
"There's just nothing in our area that we can afford now," Mr Chamberlain said.
"Maybe a little shack."
They're now considering going to a different lender to see if they can get more money, or they'll consider holding off buying a bit longer to see if property prices in their area go down.
'Higher interest rates eroding borrowing capacity'
Rising interest rates are the main factor being credited for the property market's recent downturn.
CoreLogic's latest housing price data this week showed that property values nationally have gone down 2 per cent in three months.
That's the fastest rate of decline since the 2008 global financial crisis.
"Clearly, higher interest rates are eroding borrowing capacity," CoreLogic's Tim Lawless told ABC News.
Prices nationally would need to drop by 28 per cent to take the market back to where it was before the pre-pandemic boom.
Currently, CoreLogic is forecasting a drop of 12 to 15 per cent at a maximum by sometime next year.
'Feedback loop' causes 'boom and bust cycles'
Mortgage broker Bruce Carr describes the current property market situation as a "feedback loop" where it is not necessarily easier for people to buy a home as their borrowing capacity diminishes.
"You get the feedback loop on the way up, and you get the feedback loop on the way down," mortgage broker Bruce Carr told ABC News.
"And that's where the clashing boom and bust cycles come from."
He hasn't had any clients have their borrowing capacity wound back yet but he's expecting this to start happening soon.
Using borrowing calculators, Mr Carr estimates that his clients are now able to borrow 11 per cent less today than they could one year ago.
He believes this is not just because banks are factoring in higher interest rates, but also because a rising cost of living is being factored into people's household budgets and therefore their ability to repay mortgages.
Annual inflation is currently at a 21-year high of 6.1 per cent in Australia.
"We all know that inflation is feeding into this," Mr Carr said.
In a statement, APRA acknowledged that borrowing capacity is dropping.
"The recent reduction in borrowing capacity has largely been driven by the increase in official interest rates," a spokesperson said to ABC News.
"All else constant, an increase in interest rates will mean that the maximum amount that households can borrow against their income will decline."
In a statement, the Australian Banking Association said many factors were being taken into account by lenders.
"Every new borrower is assessed on a case-by-case basis due to a wide range of factors including total amount of loan, total amount of deposit, the loan to value ratio or LVR, whether a borrower is an owner-occupier or investor, and an assessment of a borrower's revenue and expenditure," an ABA spokesperson said.
"Banks make their own commercial decisions but ultimately competition is strong between banks, and borrowers should regularly review their arrangements and shop around for the best deal."
