What baby boomers who go on about 18 per cent interest rates fail to mention

Baby boomers who go on about the 18 per cent interest rates they paid in 1989 often fail to mention that houses compared with incomes were significantly cheaper 34 years ago.

AMP Capital chief economist Shane Oliver said high immigration in recent decades caused property price rises to vastly outpace wages growth, negating the need for excessively high double-digit interest rates to curb inflation. 

The Reserve Bank on Tuesday raised the cash rate for a 10th straight month to an 11-year high of 3.6 per cent. The 32-year high inflation rate of 7.8 per cent is well above the central bank’s 2 to 3 per cent target. 

The 3.5 percentage points worth of rate hikes since May 2022 are the most severe in a short time since the RBA first published a target cash rate in January 1990. 

Borrowing costs haven’t risen at such a steep pace since January 1988 to November 1989, when the overnight cash rate surged from 10.6 per cent to 18.2 per cent, during the era before the Reserve Bank made monthly announcements. 

Dr Oliver, who is himself a baby boomer, noted that Australia’s household debt as a share of income stood at 68 per cent in the late 1980s, compared with 188 per cent now  – a level that’s among the world’s highest.

‘So rates shouldn’t have to go up anywhere near as much as they did in the 1980s to slow spending and hence inflation,’ he said.

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Baby boomers who go on about the 18 per cent interest rates they paid in 1989 often fail to mention houses compared with incomes 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 house price of $1,217,308 is now so expensive, despite a 14.7 per cent fall in the year to February, that a borrower needs a 20 per cent deposit of $243,461, CoreLogic data showed.

Someone on an average, full-time salary of $94,000 paying off a $973,846 loan 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 their pre-tax salary.

That means an Australian on an average salary can only borrow $436,000 to buy a $545,000 home with a 20 per cent deposit, with that Canstar calculation done before the latest rate rise.

That would be insufficient to buy the typical house in Melbourne, where $897,222 is the median price, Brisbane where $767,781 is the mid-point and Adelaide where the middle market house is $694,653.

Sydney has no suburbs that are affordable for an average-income earner wanting a detached home with a backyard, which means they have to drive two hours north to the industrial Newcastle suburb of Beresfield where $528,654 is the median house price.

But in 1989, a middle market house in Sydney, Australia’s most expensive capital city market, was attainable for an average-income earner looking to live in an inner or middle-distance suburb.

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

The 20 per cent deposit of $34,170 was barely more than a year’s wage and someone paying off a $136,680 mortgage had a manageable debt-to-income ratio of 5.08.

The 3.5 percentage points worth of hikes since May 2022 are the most severe in a short time since the RBA first published a target cash rate in January 1990

Sydney’s median house price of $1,217,308 is now so dear,a borrower needs a 20 per cent deposit of $243,461. Someone on an average, full-time salary of $94,000 paying off a $9783,846 loan would now have a very dangerous debt-to-income ratio of 10.4 (pictured are houses at Oran Park in the city’s outer south-west)

So while 18.2 per cent interest rates in 1989 consumed a comparable portion of someone’s after-tax income as 2023, in terms of monthly mortgage repayments, a borrower battling very high interest rates was paying off a much better value home. 

Dr Oliver said the return of migrants to Australia was more likely to spark a recovery in house prices, despite a series of interest rate rises.

‘Of course, the relationship between prices and capacity to pay is not perfect and there is a risk that rising underlying housing demand from the return of immigrants and low new listings will offset the impact of higher interest rates on property prices,’ he said.

High immigration is more recent decades has caused house price increases to vastly outpace wages growth, leading to much higher debt-to-income ratios.

In the 1989-90 financial year, Australia accepted 120,200 new migrants, with 52,700 of them in the skilled category, 66,600 in family reunion and 900 regarded as special eligibility. 

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

In 2021-22, as the international border was reopened, Australia accepted 160,000 new migrants, with 79,600 of the skilled variety, 80,300 in the family category and 100 with special eligibility.

That’s rising to a planned 195,000 in 2022-23, with 142,400 skilled, ​52,500 family and 100 special eligibility.

But in the October Budget, Treasury forecast a 235,000 net annual immigration figure – based on arrivals including international students minus departures.

Treasurer Jim Chalmers admitted in January that numbers could exceed 300,000 as more skilled migrants to brought in to fill labour shortages. 

But he last week told 60 Minutes Australia would not go back to having 17.5 per cent interest rates like 1990. 

‘There’s absolutely no chance that interest rates will get to the level that they were at in the early 1990s,’ Dr Chalmers said.

AMP Capital chief economist Shane Oliver, who is himself a baby boomer, noted that Australia’s household debt as a share of income stood at 68 per cent in the late 1980s, compared with 188 per cent now – a level that’s among the world’s highest