Which baby boomers, going for about 18 percent interest rates, don’t mention

Baby boomers, who rave about the 18 percent interest they paid in 1989, often hide the fact that houses were significantly cheaper compared to earnings 34 years ago.

AMP Capital chief economist Shane Oliver said high immigration over the past few decades has meant house prices have far outpaced wage growth, negating the need for excessively high double-digit interest rates to curb inflation.

The Reserve Bank on Tuesday raised interest rates for a 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 period since the RBA first published interest rates in January 1990.

Borrowing costs have not risen as much from January 1988 to November 1989, when the federal funds rate rose from 10.6 percent to 18.2 percent, in the period before the Reserve Bank made monthly announcements.

dr Oliver, who is a baby boomer himself, noted that Australia’s household debt as a percentage of income was 68 percent in the late 1980s, compared with 188 percent today – a level among the highest in the world.

“So interest rates shouldn’t have to rise nearly as much as they did in the 1980s to curb spending and thereby inflation,” he said.

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Baby boomers, when talking about the 18 per cent interest rate they paid in 1989, often forget to mention homes compared to incomes that were significantly cheaper 34 years ago (pictured 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 requires a $243,461 20 percent deposit, 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.

Australia’s Prudential Regulation Authority considers it dangerous for a borrower to owe the bank more than six times their pre-tax salary.

That means an Australian with an average salary can borrow just $436,000 to buy a $545,000 home with a 20 percent down payment, with this Canstar calculation done before the last rate hike.

That would not be enough to buy a typical home in Melbourne where $897,222 is the median price, Brisbane where $767,781 is the median and Adelaide where the median market house is $694,653.

But in 1989, a mid-market house in Sydney, Australia’s most expensive capital city market, was within reach of an average wage earner.

The median home price was $170,850 back then, when Australia’s median full-time salary was $26,874.

The $34,170 20 percent bail was little more than a year’s wages, and someone paying off a $136,680 mortgage had a manageable debt-to-income ratio of 5.08.

The hikes of 3.5 percentage points since May 2022 are the most severe in a short period since the RBA first published interest rates in January 1990

Sydney’s median home 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 are homes in Oran Park in the city’s extreme southwest) .

So while 18.2 percent interest rates in 1989 consumed a comparable portion of a person’s after-tax income in 2023 in terms of monthly mortgage payments, a borrower struggling with very high interest rates was paying off a much better home.

dr Oliver said the return of migrants to Australia is more likely to spark a rebound in house prices, despite a string of rate hikes.

“Of course, the relationship between prices and ability to pay is not perfect, and there is a risk that rising basic demand for housing due to returning immigrants and low new registrations will offset the impact of higher interest rates on house prices,” he said.

High levels of immigration over the last few decades have caused house price increases to far outpace wage growth, leading to much higher debt-to-income ratios.

In FY1989/90, Australia accepted 120,200 new migrants, 52,700 in the skilled migrant category, 66,600 in the family reunification category and 900 as eligible.

But that was a particularly high year, with intake more than double the 54,500 of 1984-85.

In 2021-22, when the international border reopened, Australia accepted 160,000 new migrants, including 79,600 of the qualified variety, 80,300 in the family category and 100 with special qualifications.

That rises to a projected 195,000 in 2022-23, with 142,400 professionals, 52,500 dependents and 100 special beneficiaries.

But in the October budget, the Treasury Department forecast an annual net immigration figure of 235,000 – based on arrivals, including international students, minus departures.

Treasurer Jim Chalmers admitted in January there could be more than 300,000 skilled migrants to fill the labor shortage.

But he told 60 Minutes last week that Australia would not go back to 1990 interest rates of 17.5 percent.

“There is absolutely no chance of interest rates going back to where they were in the early 1990s,” said Dr. Chalmers.

AMP Capital chief economist Shane Oliver, who is himself a baby boomer, found that Australia’s household debt as a percentage of income was 68 percent in the late 1980s, compared with 188 percent today – a level among the highest in the world

Source: | This article originally belongs to Dailymail.co.uk