What baby boomers who go on about 18 per cent interest rates fail to mention
Baby boomers who go on about the 18 percent interest rate they paid in 1989 often fail to mention that homes were significantly cheaper compared to incomes 34 years ago.
Shane Oliver, chief economist at AMP Capital, said high immigration in recent decades caused real estate price increases to vastly outpace wage growth, negating the need for excessively high double-digit interest rates to curb inflation.
The Reserve Bank on Tuesday raised its cash interest rate for the 10th straight month to an 11-year high of 3.6 percent. The 32-year high inflation rate of 7.8 percent is well above the central bank’s target of 2 to 3 percent.
The rate hikes of 3.5 percentage points since May 2022 are the most severe in a short time since the RBA first issued a target rate in January 1990.
The cost of borrowing has not risen this fast since January 1988 to November 1989, when overnight interest rates rose from 10.6 percent to 18.2 percent, before the Reserve Bank made monthly announcements.
Dr. Oliver, who is a baby boomer himself, noted that Australian household debt as a share of income was 68 per cent in the late 1980s, compared to 188 per cent today – a level that is among the highest in the world.
“So rates shouldn’t rise as much as they did in the 1980s to slow spending and thus inflation,” he said.
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Baby boomers who continue at the 18 per cent interest rates they paid in 1989 often fail to mention that houses were significantly cheaper compared to incomes 34 years ago (pictured shows then Labor Prime Minister Bob Hawke with his wife Hazel and Treasurer Paul Keating )
Sydney’s median house price of $1,217,308 is now so expensive, despite falling 14.7 percent in the year to February, that a borrower needs a 20 percent down payment of $243,461, CoreLogic data showed.
Someone with an average full-time salary of $94,000 paying off a $9,783,846 loan would now have a very dangerous debt-to-income ratio of 10.4.
The Australian Prudential Regulation Authority considers it dangerous for a borrower to owe the bank more than six times his pre-tax salary.
That means an Australian on an average salary could borrow just $436,000 to buy a $545,000 home with a 20 per cent down payment, with that Canstar calculation done before the last interest rate hike.
That would be insufficient to buy the typical home in Melbourne where $897,222 is the median price, Brisbane where $767,781 is the midpoint and Adelaide where the midmarket home is $694,653.
But in 1989, a medium-sized home in Sydney, Australia’s most expensive market in Australia’s capital, was achievable for a middle-income earner.
The median house price was $170,850 when $26,874 was Australia’s median full-time salary.
The 20 percent down payment of $34,170 was barely more than an annual wage, and someone paying off a $136,680 mortgage had a manageable debt-to-income ratio of 5.08.
The 3.5 percentage point increases since May 2022 are the heaviest in a short time since the RBA first published a target rate in January 1990
Sydney’s median house price of $1,217,308 is now so expensive that a borrower needs a 20 percent down payment of $243,461. Someone with an average full-time salary of $94,000 paying off a $9,783,846 loan would now have a very dangerous debt-to-income ratio of 10.4 (pictured shows homes in Oran Park in the city’s outer southwest )
So while 18.2 percent interest rates in 1989 consumed a similar portion of a person’s after-tax income in 2023 in terms of monthly mortgage payments, a borrower battling very high interest rates was paying off a house with a much better value.
Dr. Oliver said the return of migrants to Australia is more likely to trigger a recovery in house prices, despite a series of interest rate hikes.
“Of course, the relationship between prices and ability to pay is not perfect and there is a risk that rising underlying demand for housing due to the return of immigrants and low new listings will offset the impact of higher interest rates on real estate prices,” he said.
High levels of immigration in recent decades have led to house price increases vastly outpacing wage growth, leading to much higher debt-to-income ratios.
In the 1989–1990 financial year, Australia accepted 120,200 new migrants, of which 52,700 were in the skilled category, 66,600 in family reunification and 900 considered particularly suitable.
But that was a particularly high year, with intakes more than double the 1984-85 level of 54,500.
In 2021-2022, when the international border reopened, Australia accepted 160,000 new migrants, of which 79,600 were of the skilled type, 80,300 in the family category and 100 with special aptitude.
That rises to a planned 195,000 in 2022-23, with 142,400 skilled, 52,500 family and 100 special aptitude.
But in its October budget, the Treasury Department projected a net annual immigration figure of 235,000 — based on arrivals including international students minus departures.
Treasurer Jim Chalmers admitted in January that the number could exceed 300,000 if more skilled migrants were brought in to fill the labor shortage.
But he told 60 Minutes that Australia would not go back to 17.5 percent interest rates as they did in 1990.
“There is absolutely no chance that interest rates will return to the levels of the early 1990s,” Dr Chalmers said.
AMP Capital chief economist Shane Oliver, who is a baby boomer herself, noted that Australia’s debt as a share of income was 68 percent in the late 1980s, compared to 188 percent today – a level that is among the highest in the world.