Many first-home buyers hoped they would finally get a chance at the Australian dream when big banks forecast the biggest property price plunges in history earlier this year.

But their optimism was short lived.

Housing affordability is rapidly worsening as the sheer pace of interest rate hikes squeezes buyer borrowing power much faster than home prices can realistically fall.

In a speech on Monday, Reserve Bank head of domestic markets Jonathan Kearns revealed the size of mortgage buyers can afford fell a staggering 20 per cent in the past five months – since the RBA began its record streak of rate hikes to curb inflation.

“A lot of media attention is placed on the increase in existing borrowers’ repayments when interest rates increase,” Dr Kearns said.

“But higher interest rates also reduce the maximum loan size for prospective borrowers looking to purchase housing.”

From bad to worse for buyers

Against this backdrop, first-home buyers have rapidly retreated from the market.

The pandemic sparked a massive boom in new buyers rushing to buy amid huge public subsidies and record-low interest rates, but that trend has unravelled – big time.

The latest official data showed the number of first-home buyer loans fell below decade averages in July – down a whopping 48 per cent – from an earlier peak in January 2021.

And who could blame them? The maths are brutal.

Over the past three months average capital city house prices fell just 3.4 per cent, according to CoreLogic figures, after they rose more than 20 per cent over two years to 2022.

That pales in comparison to a 20 per cent squeeze on borrowing power.

So, while houses are now cheaper, the loans people can afford are much smaller. That shakes out into an affordability squeeze for many.

In fact, the proportion of median household income required to service a new home loan is set to reach 56 per cent very soon – a record high – according to new analysis from Barrenjoey.

“In the very near term the rapid rise in interest rates (both fixed and floating) is expected to outweigh falling house prices,” analysts at the investment firm said.

Still opportunities: Broker

Despite the shrinking borrowing power for buyers, mortgage broker and Zippy Financial director Louisa Sanghera said there are still opportunities in the market.

“First-home buyers have backed off,” she said.

“Rising interest rates scare them … but to be honest, we’re still getting them through [to a home loan].”

“As long as they’ve got a deposit together, we’re not having too many issues.”

Ms Sanghera said lenders, particularly those outside the big four banks, were still willing to extend sizeable home loans to first-time buyers, despite rising rates.

But you need to stick to your budget and, perhaps, consider looking further out from the major city centres.

“They might not be able to get in on the northern beaches [of Sydney], but they’ll be able to buy a property on the upper north shore,” Ms Sanghera said.

“You’ve got to buy to budget.”