Interest rates are lower than ever. So why is owning a home harder than ever?
Today the Reserve Bank is expected to once again keep interest rates on hold – marking 22 months straight of the cash rate being at 1.5%. Such low interest rates raise the question of housing affordability – surely such low rates mean it is a good time to be paying off a house? But the data shows that even with such record low rates people buying a house now face a much tougher task than did those in the 1990s, including those who experienced record high interest rates.
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Right now there is no sense of another rate rise coming soon. In January the market predicted by November this year the cash rate would definitely have been raised to 1.75%. Now that “certainty” has been shifted out to September next year:
For so long the cash rate has been at 1.5% that it is quite easy to forget just how abnormally low it is.
Less than a decade ago, during the GFC, when the cash rate was lowered to 3% it was considered to be at “crisis levels”. Now no one is even considering such a rate in the near future.
We are living in a period of such low interest rates that it seems scarcely possibly that there was a time high interest rates were a worry. And yet 29 years ago this month in June 1989, the standard variable mortgage rate hit 17% – remaining there through to March 1990.
Georgie Hay from the finance comparison website RateCity pondered, in light of the current low interest rates we are experiencing, whether or not Australians were better off now with interest rates well below that 17% level.
It’s a tough question because in that time much has changed.
Back then interest rates were high, but so too was inflation – 6.8% compared with 1.9% now:
Consider as well that back then just 59% of married women aged 25-34 were in the labour force, compared with 75% now:
But also a lower percentage of women of that age are now married and, overall, fewer people are working full-time, which means that average earnings are less connected to full-time earnings than they once were.
It makes comparing house prices and household income tricky – especially as the ABS’s survey of household expenditure only comes out every five years – and does not cover the period when rates hit 17%.
But at least we can see that the share of household income going to mortgage repayments in 2015-16 was much higher than it was in the 1980s and even early 1990s:
But the reality is that working full-time is still the most likely situation you need to be in to be able to afford to buy a property. So even though it is not a perfect measure, comparing the size of an average mortgage with average male fulltime earnings remains a good way to get a regular measure of affordability – both of taking out a mortgage and then paying it off.
In 1989, the average mortgage across the country was $66,200, or 2.3 times the size of average annual full-time male earnings of $28,444. With interest rates at 17%, that meant that a monthly mortgage repayment of $943.80 was equal to 39.8% of an
average male’s full-time earnings.
In 2017, the situation has changed rather drastically. The average mortgage size last year across the nation of $374,100 was 4.3 times the $86,460 average male full-time earnings. But with a standard variable rate of 5.2%, the average monthly repayment on that mortgage was just 28.5% of monthly male full-time earnings:
This of course is the average for the nation, but if we look at NSW only, we see a similar but more exaggerated picture.
The ratio of mortgage to annual earnings in that state has gone from 2.8 to 5.3, while repayments have gone from a 47.5% share to now 34.7%:
Certainly the 47.5% share of income going to mortgage repayments in 1989 is stunning, but such has been the increase in house prices this century, the share of income going to repayments has been higher since 2003 than it was for most of the 1990s.
And while if you took out a mortgage in 1989 in Sydney you were on average going to be paying a huge share of your income in repayments, most people did not buy a house in 1989, and your repayments are based on your mortgage, which does not change, unlike the average monthly mortgage size.
This means if, for example, you bought a house in Sydney in 1988 – when the average NSW mortgage was just $64,700 – you paid a huge whack of your income in repayments in 1989, but they very quickly fell as the cash rate plummeted from 17% in March 1990 to 4.75% in July 1993:
This was also a period of solid wage growth. In the five years from 1989 to 1994, male full-time earnings rose 22%, compared with just half that in the five years from November 2012 to November 2017 (the caveat being you needed to keep your job during the 1990s recession – not the easiest of things to do).
It meant that if you took out a mortgage in 1988, by 2001 your repayments were worth just 11.7% of average male full-time earnings.
Much has changed with monetary policy since we had 17% interest rates. Interest rates are much lower now but house prices are much higher.
So large has been the increase in house prices that rather than needing a 17% mortgage rate to chew up 47.5% of the earnings of a male fulltime worker, now it would need a rate of just 8.5%.
Were the cash rate back at the previously “crisis level” of 3%, and the standard variable rate rose by the same amount, average mortgage repayments would account for 40.8% of male full-time earnings – higher than was seen in nine of the 10 years in the 1990s.
And this is the problem for those looking to get into the housing market compared with those who had to cope with the massive interest rates of 1989 and 1990 – their mortgage was a lot less and their repayments were able to fall.
Today’s prospective buyers know interest rates are not going to fall by much, if at all, and yet their mortgage – and the repayments – are already huge compared with their income.
• Greg Jericho is a Guardian Australia columnist