Pressure set to squeeze first-home buyers as a combination of factors makes it even tougher to get a foot in the door of home ownership.

The watering down of government grants from September 30 comes as home loan interest rates are tipped to rise, banks have toughened lending requirements and house prices remain among the most expensive in the world.

Economists have predicted the Reserve Bank will start lifting the official cash rate, possibly as early as next month.

Loan Market Group executive director John Kolenda said he expected the RBA to raise rates by two percentage points during the next 18 months and said home owners should be budgeting for it as the economy turned around.

But Bill Morris, author of the Midwood Queensland Investment Report, said it would be foolish to lift interest rates now as house prices in Queensland continued to fall and were down 10.3 per cent from their peak in December 2007.

"Prices showed no sign of recovery at last count in June 2009. To increase interest rates at such a time would be terminal for house prices into the foreseeable future," he said.

The managing director of home loan comparison website helpmechoose.com.au, Adir Shiffman, said the drop in the government grant, recent rises in fixed home loans and rising property prices were "spooking people and pushing them into the market again".

"The level of urgency in the home loan market is the highest it has been for all of 2009," he said.

Dr Shiffman said people thinking about switching to fixed-rate loans now had missed the boat as fixed rates were up to two percentage points higher than current variable rates.

"If people are buying today they should work out what they can afford based on today’s interest rates, then they should add 2 per cent and work out the affordability of that," he said.

Mortgage and Finance Association of Australia chief Phil Naylor said a slowing of first-home buyer activity was predictable, with the halving next month of the Federal Government’s First Home Owners’ Boost to $3500 for established homes and $7000 for new homes and the removal of the grant from December 31.

Share this article