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FIND MANNINGHAM | JULY 2022
www.findmanningham.com.au
Oh, the pain of interest rate rises By Warren Strybosch
I don’t know about you, but we are feeling the pain of all these interest rate rises, and I am not sure anyone, except the RBA, knows when they are going to stop. We were supposed to have had our renovations finished last year but it got pushed out to June and even now we continue to incur delays. This delay has resulted in us missing locking in our interest rate on the new home mortgage (currently the construction loan). We were supposed to have locked the rate in back in January for four years. So, not only has the renovations cost us more due to building supply constraints due to COVID, but we are now going to have to pay higher mortgage repayments over the next four years because of the unforeseen delays – we have missed the ‘fixed-rate’ boat. Yes, I can hear the “pffts”, and “put your adult pants on” from all those who had mortgages throughout the 1980’s. With the 30-year fixed mortgage rate reaching a pinnacle of 18.4 percent in October 1981 and seesawing down to the 9 percent range by 1986 and closing the decade at 9.78 percent, you might have reason to think we still have it relatively easy. But as my own children remind me when I start telling my war stories, ‘about when I was young’, that my life is not their life and that I need to have some consideration as to what they might be going through right now rather than being dismissive about it. So, hopefully all of you Baby Boomers, who have already paid off your mortgages, might be able to emphasize with those of us who still have one. What is happening with interest rates? On the 5th of July the Reserve Bank of Australia (RBA) announced at its monetary policy meeting an increase in the cash rate by 50 bps. It marked the second 50-bp hike in a row and followed the 25-bp hike in May, taking the official cash rate to 1.35 per cent, up from 0.85 per cent. The RBA board’s decision comes as inflation is expected to hit 7 per cent at a time when unemployment rates are low, household budgets are under pressure and global uncertainty remains.
In 1984...
In 2022...
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The average home cost was $64,039.
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The average home costs $920,100.
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The average annual income was $19,188.
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The average annual income is $90,896.
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The average mortgage was $42,277.
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The average mortgage is $618,722.
Deposits then and now 1984
2022
• If the average home cost $64,039...
• If the average home cost $920,100...
• A 20% deposit equals $121,807.
• A 20% deposit equals $184,020.
Governor Philip Lowe anticipates that Australia’s inflation will peak this year before declining back down towards 2-3 per cent, driven by an increasing interest rate environment.
Let's take a trip back to the housing market of 1984 to see just how different buying a house was in the 80s versus today.
Higher interest rates will also help establish a more sustainable balance between the demand for and the supply of goods and services,” he said.
Australian home buyers today must save bigger deposits, borrow much more and face much larger repayments. This means more of their weekly income goes into housing costs today than in 1984.
Ironically, we are experiencing the same run-away inflation that occurred in the 1980’s due to high government spending, increased property prices and people still spending their money. As a result of increased inflation, interest rates continue to rise, and there is going to be a world of pain felt by a lot more people now compared to the pain that was felt in the 1980’s. Australians now are experiencing it harder The truth is that the average Australian is now purchasing homes that are worth way more than what they were worth in the 1980’s. In fact, the average Australian now is spending on average 10 times their annual earnings on their first home compared to the Boomers who paid 3.3 of their average annual earnings. The average Australia in 1984 could buy a home that cost 3.3 times their annual income. In 2022, it's 10 times what the average person earns in a year.
Australian buyers in 2022 now have to save much bigger deposits. Saving a deposit is one of the big challenges for home buyers in 2022. As prices have risen so much, the amount you have to save for a 20% deposit just keeps jumping up. This is a stark contrast. In 1984, a 20% deposit was 66% of a year's income. Today, it's 202%. It would take you just over 2 whole years' of income to save the same deposit. (Source: finder.com.au) Further hikes anticipated Further rate hikes are anticipated, and it is likely we will see rates increase by at least another 50-bp before the end of the calendar year. Even Brokers are expecting more rates rises to come.
