LOCAL STORIES

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...

• The average home cost was $64,039. • The average annual income was $19,188. • The average mortgage was $42,277.

In 2022...

• The average home costs $920,100. • The average annual income is $90,896. • The average mortgage is $618,722.

Deposits then and now

1984

• If the average home cost $64,039... • A 20% deposit equals $121,807.

2022

• If the average home cost $920,100... • 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.

Higher interest rates will also help establish a more sustainable balance between the demand for and the supply of goods and services,” he said.

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. 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.

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.

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.

With a greater amount of uncertainty for mortgagees, and the likelihood of further rate rises, it is important to review your budget and consider what changes have to be made to get through the next few years.

Strategies to consider

One way to potential save on costs is to review all your general and personal insurances. Speak to someone at Find Insurance (www.findinsurance.com.au) and see whether there is an opportunity to save on premiums.

Also, make sure you have a good mortgage broker to talk to. They may be able to help you find a better rate rather and pay less mortgage repayments each month. Do you have ‘toys’ you can sell? You might want to consider selling some ‘toys’ now before everyone starts doing it. This might be a quick way to reduce some of your debt.

Start growing your own vegies. Yep, it takes time but rather than watching more TV, get outside and grow some of your own food. With food prices increasing, you might be able to grow vegies and swap your surplus with others in your local neighbourhood.

Export restrictions push up food prices

Dominic Giannini (Australian Associated Press)

Export restrictions in about 24 countries globally are pushing up prices and increasing food insecurity, according to the Australian Bureau of Agricultural and Resource Economics and Sciences.

The latest ABARES Insights report showed food prices have increased 65 per cent in the past two years, and reached their highest level since October 2012.

Executive director of ABARES Dr Jared Greenville said there were lessons to be learnt from the 2007-08 food crisis. “Often when there is an increase in world food prices, governments respond by placing export restrictions on their own commodities,” Dr Greenville said.

“The aim is to moderate domestic prices and ease the burden on their own populations, which is understandable in the circumstances.” But the report said the 2007-08 global food crisis showed export restrictions are detrimental to global food security, and provide “questionable benefits” to the domestic market. “Export restrictions reduce the supply of food in world markets and increase prices, creating greater incentives for other countries to restrict exports,” ABARES said.

“For this reason, widespread export restrictions have a negative impact on global food security and hurt the poorest people who are already struggling to put food on the table.”

The report found several factors are contributing to higher global food grain prices, including the Russian invasion of Ukraine, poor growing conditions in major exporter countries, and the impacts of COVID-19.

Tim Harcourt, chief economist at the University of Technology, Sydney, said experts have been warning export restrictions would push prices up and help with increasing domestic food security. “It’s what a few of us were predicting a few months ago, that we’re going to have a global food crisis,” Professor Harcourt told AAP. He said the export restrictions have seen price increases to wheat, palm oil, maize and barley. “They (export restrictions) are going to hurt the poorest people who need the food, not just at home but abroad,” he said.

The report concluded there had been an increase in the number of countries introducing export restrictions which could cause world prices to spiral higher. The Food and Agriculture Organization of the United Nations estimates between 720 to 811 million people faced hunger in 2020, with high food prices making conditions even more challenging.

Governments across Asia, Africa and the Middle East have introduced export restrictions in response to rising grain prices, in an attempt to ease their domestic food prices. “Removing export restrictions, or agreements to avoid implementing them in the first place, can help to ensure food is more available globally and increase the stability of food supplies,” Dr Greenville said.