First-home buyers retreat as mortgage slowdown drags on

First-home buyers are abandoning the mortgage market at the fastest rate since 2022, as high property prices continue to outweigh any relief from a stabilising interest rate outlook.

New Equifax Consumer Market Pulse data shows first-home buyer mortgage demand fell 20.1% year-on-year in August, the steepest annual decline in four years and significantly worse than the broader mortgage market.

Overall mortgage demand dropped 14.1% from a year ago, marking a fifth straight month of contraction. 

Although the pace of decline has moderated from July's 16.4% fall, lending activity remains subdued across much of the country.

Speaking on the Savings Tip Jar podcast, Equifax Chief Solutions Officer Kevin James said first-home buyers were pulling back at a much faster rate than the broader mortgage market.

"For the mortgage market in Australia to have three consecutive drops is very unusual, but I think one of the more startling things is a 20% drop in the first home buyers,” Mr James said.

The figures suggest a growing number of prospective buyers are waiting on the sidelines as housing affordability remains stretched and uncertainty lingers around property prices and interest rates.

Affordability hurdle remains

The decline comes despite a range of government measures aimed at helping Australians enter the housing market.

But Mr James said government-backed deposit schemes can only do so much when affordability remains the bigger problem.

"The 5% deposit schemes were there to help, but it's only one barrier to entry, right? There's a number of barriers and the other one is affordability," he said.

"What we're not seeing is those prices drop. When we look at the average first home buyer, you're looking at $740,000, that hasn't reduced. So I think you've still got the other barrier to entry there on affordability, and that's starting to drive it down."

The first-home buyer slowdown has steadily worsened over recent months, with demand falling 13.4% in May, 17.2% in June, 19.2% in July and now 20.1% in August.

The steepest declines were recorded in Queensland and New South Wales, where first-home buyer demand fell 22.6% and 22% respectively.

"I think people are in a bit of a 'watch and see'. Not only that, they're also in a 'watch and see' to see what's going to happen with the new interest rates," Mr James said.

Younger borrowers lead the retreat

The pullback is most evident among younger Australians, the cohort most likely to be entering the housing market.

Equifax data shows mortgage demand among 18 to 25-year-olds fell 21.7% year-on-year in August, while demand from 26 to 35-year-olds dropped 18.1%.

Mr James said affordability concerns were becoming more acute as buyers tried to gauge where both rates and prices would land.

"If they [interest rates] go up again, then it's an affordability hit… and if prices don't come down, they're not going to meet and you're going to see those diverge," he said.

The data also points to a broader shift in sentiment across the housing market, with investors beginning to pull back alongside owner-occupiers.

"When you're looking nationally at those kinds of numbers, I think you are seeing investors starting to pull back in the market," Mr James said.

The slowdown is not playing out evenly across the market.

While first-home buyers continue to retreat, refinancing activity showed signs of stabilising in August.

The number of borrowers switching lenders was down just 0.8% year-on-year, a marked improvement from July's 8.4% decline.

Western Australia and Queensland returned to growth, with refinance activity rising 2.3% and 1% respectively, suggesting many existing homeowners remain focused on finding lower rates even as would-be buyers stay on the sidelines.

Mr James said older borrowers were leading the refinancing activity as they searched for better deals.

"They're starting to shop for deals. They're starting to look at different interest rates," he said.

Signs the downturn may be stabilising

While mortgage demand remains firmly negative, there are tentative signs the market may be approaching a floor.

August's 14.1% annual decline was less severe than July's 16.4% drop, and refinancing activity has started to stabilise after weaker conditions earlier in the year.

Borrowers switching lenders were down just 0.8% year-on-year in August, a significant improvement from July's 8.4% decline.

Mr James said the mortgage downturn may be nearing its low point, but a recovery is unlikely to materialise quickly.

"Is it starting to plateau now and then wait and see what happens with the interest rates? Potentially. Whether we've hit bottom, I don't know, but I would like to think that we are nearing the bottom of the softness,” he said.

"I think we're in this for at least towards the end of the year and then potentially into early 2027."

For first-home buyers, that means the wait for a more affordable housing market may not be over yet.