Baby boomers who stick with the 18 percent interest rates they were paying in 1989 often fail to mention that homes relative to income were significantly cheaper 34 years ago.
AMP Capital Chief Economist Shane Oliver said high immigration in recent decades caused property price increases to far outpace wage growth, negating the need for excessively double-digit interest rates. high to curb inflation.
The Reserve Bank on Tuesday raised the cash rate for the 10th straight month to an 11-year high of 3.6 percent. The high 32-year inflation rate of 7.8 percent is well above the central bank’s target of 2 to 3 percent.
The 3.5 percentage point rate increases from May 2022 are the most severe in a short time since the RBA first published a target cash rate in January 1990.
Borrowing costs have not increased at such a steep pace from January 1988 to November 1989, when the overnight interest rate rose from 10.6% to 18.2%, during the era before the Bank of the Reserve made monthly announcements.
Dr Oliver, who is a baby boomer, noted that Australia’s household debt as a percentage of income was 68% in the late 1980s, compared to 188% today, a level that is among the highest in the world.
“So rates shouldn’t have to go as high as they did in the 1980s to curb spending and therefore inflation,” he said.
scroll down for video
Baby boomers who continue with the 18 percent interest rates they paid in 1989 often fail to mention that houses relative to income were significantly cheaper 34 years ago (pictured is then-Labor Prime Minister Bob Hawke with his wife Hazel and treasurer Paul Keating)
Sydney’s median home price of $1,217,308 is now so expensive, despite a 14.7 percent drop in the year to February, that a borrower needs a 20 percent deposit of $243,461, according to CoreLogic data.
Someone with a median full-time salary of $94,000 paying off a loan of $9,783,846 would now have a very dangerous debt-to-income ratio of 10.4.
The Australian Prudential Regulation Authority considers it dangerous for any borrower to owe the bank more than six times his salary before tax.
That means an Australian on an average salary can only borrow $436,000 to buy a $545,000 house with a 20 per cent down payment, with that Canstar calculation done before the latest rate increase.
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 mid-market home is $694,653.
Sydney has no suburbs that are affordable for a middle-income person who wants a detached house with a backyard, which means you have to drive two hours north to Beresfield, an industrial suburb of Newcastle, where $528,654 is the median price. of a house.
But in 1989, a mid-market home in Sydney, Australia’s most expensive capital market, was affordable for a middle-income person looking to live in an inner or mid-distance suburb.
Median house price was $170,850 when $26,874 was Australia’s median full-time salary.
The 20 percent deposit of $34,170 was just over a year’s salary, and someone paying a $136,680 mortgage had a manageable debt-to-income ratio of 5.08.
The 3.5 percentage point increases from May 2022 are the most severe in a short time since the RBA first published a target cash rate in January 1990.
The median Sydney home price of $1,217,308 is now so high that a borrower needs a 20 per cent deposit of $243,461. Someone with an average full-time salary of $94,000 paying off a loan of $9,783,846 would now have a very dangerous debt-to-income ratio of 10.4 (pictured are homes in Oran Park in the city’s southwest)
So while interest rates of 18.2 percent in 1989 ate up a comparable share of someone’s after-tax income as they did in 2023, in terms of monthly mortgage payments, a borrower struggling with very high interest rates high, I was paying for a house of much better value.
Dr Oliver said the return of migrants to Australia was 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 the increase in underlying demand for housing from returning immigrants and the low number of new listings will offset the impact of the rates higher interest rates on property prices,” he said.
High immigration in more recent decades has caused house price increases to far outpace wage growth, leading to a much higher debt-to-income ratio.
In the fiscal year 1989-1990, Australia accepted 120,200 new immigrants, 52,700 of them in the skilled category, 66,600 in family reunification and 900 considered as special eligibility.
But that was a particularly high year, with revenue more than double the 1984-85 level of 54,500.
In 2021-22, when the international border reopened, Australia accepted 160,000 new immigrants, with 79,600 of the qualified variety, 80,300 in the family category and 100 with special eligibility.
That’s rising to 195,000 planned in 2022-23, with 142,400 qualifying, 52,500 family members and 100 special eligible.
But in the October Budget, the Treasury forecast a net annual immigration number of 235,000, based on arrivals, including international students, minus departures.
Treasurer Jim Chalmers conceded in January that numbers could top 300,000 as more skilled immigrants are brought in to fill labor shortages.
But last week he told 60 Minutes that Australia would not go back to 17.5 percent interest rates like they did in 1990.
“There is absolutely no chance that interest rates will reach the level they were in the early 1990s,” said Dr. Chalmers.
AMP Capital chief economist Shane Oliver, who is also a baby boomer, noted that Australia’s household debt as a percentage of income stood at 68 per cent in the late 1980s, compared to the 188 percent today, a level that is among the highest in the world.