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Is it harder for you to buy a home than it was for your parents?
Last week, RateCity did a comparison of borrowers in the late 1980s versus borrowers of today and the results could surprise you.
How high did rates go?
This is how RateCity’s Sally Tindall summed it up: “The highest interest rate on record was in February 1990 at 17 per cent – a reality many Australians would rather forget.
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“Now we’re living in a period of record-long, record-low interest rates. The key difference between 1990 and today is that average mortgages have risen nearly two times faster than wages. So, when it comes to paying down the mortgage each month, when you factor in the record low interest rates, we’re actually better off.”
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However, Sally makes this further point: “But ask a first home buyer to stump up a 20 per cent deposit today, and you’ve got them snookered before they’ve even started,” she said.
Year | Cash rate | Average loan size | Average annual wages | % of income on mortgage |
1990 (Feb) | 17.0 | $67,700 | $27,284 | 42.45% |
2018 | 1.50 | $388,100 | $81,619 | 28.91% |
Source: RBA lending indicator rates, ABS Housing Finance Australia, Housing Finance Commitments, ABS Average Weekly Earnings Australia – Original.
Who’s better off?
I think this settles one part of the argument that for anyone in a home today with the average size loan for Australians, compared to the average size loan for Aussies in 1990, the current day homeowner is more comfortable.
“If a single person took out an average sized home loan in the 1990s when rates were at 17 per cent, they would have spent 42.45 per cent of their income on mortgage repayments,” Sally points out. If they took out the same loan today with a lower rate of 4.50 per cent, taking into account house price increases and wages growth, the same person would spend 28.91 per cent of their income on mortgage repayments.”
Is this really true?
That’s a comparison of averages. When you get away from averages, the modern day borrower plays catch up in the pain stakes.
Note the average loan in the table for today’s borrowers — it’s $388,100. So anyone living outside of Sydney and Melbourne or living in average apartments in the not-too-expensive parts of these two capital cities would have to accept that baby boomers did it tougher in the 1990s.
Depends on where you buy, etc.
For homebuyers in Sydney and Melbourne, or in expensive suburbs of other capital cities (even in apartments), the average size loan could be double the amount, and even triple!
These people could be worse off but it depends on their income. And many of these people could be couples both on high incomes greater than $81,619, which was the average income used in RateCity’s example.
It looks like it’s a choice of where to live that makes borrowing for a home tougher nowadays, compared to the battlers of the late 1980s and 1990.
Turned a dump into a dream
But you might say “hang on, you were living in Paddo, which is hardly a battler’s suburb!” Well, that’s the story then but when we moved into Paddington it was a relatively cheap suburb, with potential. When my father-in-law saw the ‘dump’ that his dear little girl had bought with her dumb husband, he said: “Love, you have to sell this as fast as you can!”
The one wage brigade
By the way, many couples then were single-income families, as the age of the working mum and childcare was only in its infancy. That’s why lots of people had to work second and third jobs to make their home loan repayments.
Baby boomers felt the pain
It looks like baby boomers, who are often seen as the generation who had it all, actually did suffer for their success, if only for a few bad years around 1990. That said, 17% home loan interest rates and 10.4% unemployment is pretty damn bad, compared to 4.5% home loans and 5.6% unemployment.
TIPS on how to save more
Arguments about who has ‘home hurt’ the most aside, what can a younger person do to reduce the pain?
The average home loan is 4.5% but there are lower rate loans, so go to interest rate comparison websites or a mortgage broker to lower the rate you’re paying.
Do a budget and see where you’re spending your money and what income is coming in.
Check out every spending amount and do things differently, like shop in cheaper suburbs, do price comparisons while you’re shopping, switch to cheaper products. Get old fashioned like the baby boomers of the 1980s who paid breakneck rates of interest.
Take your lunch to work and have coffee at cheaper cafes or make your own. Aldi has cheap espresso machines and my coffee colleagues tell me their coffee is good!
Like this baby boomer, look for weekend work. I came across an Uber driver who drove between 5am and 8am each morning before going to his job at the CBA! He also did shifts at night.
Become interested in money, investments and anything that can help build your wealth. I know a guy who did a handyman course at nights and now he buys homes, renovates them, while living in them, after which he sells them to trade up to better and better homes. He does this all capital gains tax free.
Make sure every financial product from credit cards to insurance to health cover is giving you the best deal possible.
Just do it!
If you’re not prepared to lift your game, don’t complain about how expensive life is. I know baby boomer parents can be annoying at times with their advice to other generations but some of their cost-saving and income-generating habits could easily be mimicked by young borrowers of today to their great benefit.
Remember my favourite war cry for anyone who wants to have a better business, career or a life? It’s simple – if nothing changes, then nothing changes!
