The Cost Of Waiting For A Unicorn Could Be Costly.
With talk of the next move by the RBA being up rather than down when it comes to interest rates, it is important to understand just how powerful and immediate the effect is on household borrowing capacities. One thing is for certain and that is that there is a unanimous belief by economists that the cycle of any further interest rate cuts is now over. For every 25 basis point (0.25%) increase in interest rates, lenders reassess how much a borrower can afford to repay, which directly reduces how much they are willing to lend. For many households, that seemingly small adjustment can be the difference between qualifying for a home loan and falling short.
Understanding this relationship is critical, particularly in high value markets such as Sydney’s Eastern Suburbs, where property prices have remained elevated even as borrowing capacity has been squeezed.
Why Small Rate Rises Have Big Consequences
When interest rates rise, mortgage repayments increase because borrowers are paying more interest on every dollar they borrow. Lenders don’t just look at today’s repayments, they apply serviceability buffers, meaning they test whether borrowers could still afford their loan if rates were even higher. That safety margin is designed to protect banks and borrowers, but it also amplifies the effect of rate rises on borrowing capacity.
Analysis of Australian lending data shows that a 0.25% rate rise typically reduces borrowing capacity by around $20,000 to $25,000, depending on income, household expenses and lender policy.
While that may not sound dramatic in isolation, these losses compound quickly. Finance analysts estimate that every 0.5% increase in interest rates (two 25 basis point rises) can reduce borrowing power by roughly 5%. In a city where many buyers need to borrow over $1 million, that reduction can be financially devastating.
Here is an example:
A purchase of $1,600,000: previously affordable with $1,270,000 borrowing
After a 1% rise, a household may need to:
Increase deposit (save an extra $100,000+), or
Reduce expectations (smaller home or different suburb), or
Delay purchasing hoping the market has not moved against you
Cost of renting (based on Bellevue Hill units):
Median rent: $1,595/week
Annual rent: $1,595 × 52 = $82,940 per year
On a pre-tax income ($250,000), that is roughly 33% of annual income.
Over 3 years waiting and renting instead of buying could cost $248,820 in rent alone from pre taxed income.
What This Looks Like for a $250,000 Household
Consider a household earning $250,000 per year, a strong income by any standard. When interest rates rise by 25 basis points, lenders recalculate repayments at the higher rate, reducing the maximum loan the household can service. Based on typical lender modelling, that single rate rise can reduce borrowing capacity by around $25,000 to $35,000.
After just four rate rises (1%), that same household could lose $100,000–$140,000 in borrowing power.
Thirteen Rate Rises Changed the Rules
Between 2022 and 2024, the Reserve Bank lifted the cash rate from around 0.1% to 4.35% through 13 consecutive rate increases. That unprecedented tightening cycle dramatically reshaped borrowing capacity across Australia.
Research indicates that during this period, a typical dual income household’s borrowing capacity fell by as much as 24%. In real terms, that meant many families who could borrow around $1.27 million in early 2022 could only borrow about $964,000 by late 2024, a reduction of approximately $307,000.
That decline in purchasing power occurred far faster than house prices adjusted, if at all in certain suburbs.
What a 1% Interest Rate Rise Could Mean for a Household
Household income: $250,000 per year
Current borrowing capacity: Approx. $1,270,000 (based on current rates and lender calculations)
Impact of a 1% rise in rates (four consecutive 0.25% increases):
A property costing $1,600,000: previously affordable with $1,270,000 borrowing
After 1% rise, household may need to:
Increase deposit (save an additional $100,000+), or
Reduce expectations (smaller home or different suburb)
Cost of renting instead (based on Bellevue Hill units):
Median rent: $1,595/week
Annual rent: $1,595 × 52 = $82,940 per year
On pre-tax income ($250,000), that’s roughly 33% of annual income, effectively money that could have been building equity if they had bought sooner
Over 3 years waiting, renting instead of buying could cost $248,820 in rent alone
Sydney’s Eastern Suburbs: Prices Didn’t Fall in Step
Nowhere has this disconnect been more visible than in Sydney’s Eastern Suburbs.
While interest rates were rising and borrowing power was collapsing, property prices in many premium suburbs remained stubbornly high. The median Sydney house price has stayed above $1.7 million, and in blue chip eastern suburbs such as Bellevue Hill, Rose Bay, Bronte and Double Bay, values are often far higher than the citywide median.
In some suburbs, prices softened. Neutral Bay, for example, saw median prices fall by more than 10% year-on-year during the tightening cycle but these declines were minor compared to the 20–25% collapse in borrowing capacity many households experienced.
The result? Buyers could afford far less, but properties weren’t getting any cheaper.
Renting Became Expensive Too
For buyers pushed out of ownership, renting hasn’t provided much relief. In Sydney’s Eastern Suburbs, rental prices have surged to reflect the lack of housing supply and high demand.
Current median rents highlight just how expensive the area has become:
Bellevue Hill units: around $1,595 per week
Rose Bay units: around $900 per week
Randwick units: around $850 per week
Clovelly houses: often exceeding $2,140 per week
The Renovating Trend Means Fewer Properties For Sale
Faced with high prices, reduced borrowing capacity and soaring rents, many Eastern Suburbs homeowners have chosen a different path: renovation instead of relocation.
Australian Bureau of Statistics data shows that spending on home renovations reached $12.4 billion in 2023, up 33% from 2020 and almost double what Australians spent a decade ago. That shift reflects a national move toward upgrading existing homes rather than buying new ones.
Survey data reinforces this. Aussie Home Loans found that 54% of homeowners are now choosing to renovate instead of sell, and 73% said rising interest rates were the main reason. For many, selling and buying again would mean taking on a much larger loan at higher interest rates which is a financial risk they no longer want to accept.
What This Means for Buyers and Owners
Effect on obtaining the desired home:
A purchase/home costing $1,600,000: previously affordable with $1,270,000 borrowing
After 1% rise, household may need to:
Increase deposit (save an extra $100,000+), or
Reduce expectations (smaller home or different suburb)
Cost of renting instead (based on Bellevue Hill units):
Median rent: $1,595/week
Annual rent: $1,595 × 52 = $82,940 per year
On pre-tax income ($250,000), that’s roughly 33% of annual income,
Over 3 years waiting, renting instead of buying could cost $248,820 in rent
Every 25 basis point rate rise might seem small, but when multiplied across 13 increases, the impact has been enormous. Borrowing capacity has fallen by hundreds of thousands of dollars, while property prices in Sydney’s most desirable suburbs have barely budged in comparison.
For homeowners, that has made staying put and improving what they already own the rational choice. For buyers, it has meant recalibrating expectations, seeking smaller homes, or moving further away from the city.
Ultimately, interest rates don’t just affect mortgage repayments, they reshape the entire housing market. And in Sydney’s Eastern Suburbs, their impact is being felt not through falling prices, but through a fundamental shift in how people live, buy and invest.