Borrowing capacity falling faster than house prices as rate hikes bite

Prospective home buyers in Sydney and Melbourne are losing more borrowing power than the property price declines they stand to gain, as new forecasts show modest house price falls will be outpaced by shrinking budgets driven by successive cash rate increases.

Analysis by Canstar.com.au of Westpac's latest property price forecast, shows Sydney's median house price could fall a further $29,601 between 1 May and 31 December, while Melbourne's median could decline by $18,128 over the same period, based on Cotality data.

Yet a single person earning the average full-time wage has already seen their maximum borrowing capacity drop by $35,800 as a result of rate rises this year — more than the forecast price falls in either city.

Should two further 0.25 percentage point increases eventuate — as Westpac forecasts — that same individual's total borrowing capacity could shrink by around $57,600 since the start of the year, roughly 10% of their buying budget.

Sydney's median house price has already fallen $18,977 in the first four months of 2026, according to Cotality data. For couples, the borrowing capacity reduction already stands at $71,600 — nearly four times that figure.

Home buyers hoping the federal government's proposed negative gearing and capital gains tax reforms would trigger a significant housing correction may also be disappointed. Westpac's forecasts suggest price declines will remain confined to Sydney and Melbourne, while Perth and Brisbane are expected to rise by approximately $39,000 and $32,000 respectively by year-end, despite three cash rate rises and the proposed tax changes.

A key constraint on borrowing is the serviceability buffer that the Australian Prudential Regulation Authority requires banks to apply to new mortgage applications. APRA confirmed last week it would hold the buffer at three percentage points, noting that housing credit growth remained robust despite the rate increases. With borrowers now being assessed at rates above 9%, the buffer represents a significant hurdle for new applicants.

"Changes to negative gearing and capital gains tax risk pushing Sydney and Melbourne house prices even further into reverse, however, it's unlikely to fall by as much as many first home buyers are hoping," said Sally Tindall (pictured right), data insights director at Canstar.com.au. "Westpac's forecast of a continued drop in Sydney and Melbourne prices through to the end of the year might be psychologically significant, but numerically they're ultimately pretty modest.

"Three rate hikes in quick succession have already taken a serious bite out of borrowing capacity, particularly in Sydney where buyers need to borrow significantly more just to get a foot in the door.

"Modest property price declines don't necessarily improve affordability when higher mortgage rates are stripping tens of thousands of dollars from buyers' budgets.

"Anyone hoping APRA might throw borrowers a lifeline by reducing the serviceability buffer will be disappointed. The three percentage point buffer has become an increasingly tough hurdle in a higher-rate environment because borrowers are now being assessed at rates pushing well above 9%. However, lifting the buffer would more than likely lift property prices, which is the last thing most would-be first home buyers want." 

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