Interest rates

RBA interest rate hike means millennials will struggle harder than baby boomers

Talk about today’s exchange rate and baby boomers will often hit back with the 17% rate of the 1980s. But it turns out that their argument just doesn’t hold water.

Since the Reserva Bank recently raised rates for the first time in more than 11 years, a debate has emerged over how the current cycle of rate hikes compares to those of the past, particularly in the late 1980s. , when interest rates reached 17%.

Like house prices as a broader issue, the debate has split some Australians along generational lines, with baby boomers piling on one side and much of the Gen X and Millennials on the other.

As you might have guessed, some of the comments have been reduced to little more than hyperbole and sound bites, about things like “too much mashed avocado on toast” and “this was different in my day.”

But as the debate continues around dining tables and barbecues across the country, we’ve sought to try and quantify the different perspectives. Which cycle of rising interest rates over the past 60 years presented the biggest challenge for households in terms of relative increases in interest repayments?

Historical rate hike cycles

It would be easy to look at the rate hike cycles of the mid to late 1980s and see the big increases in mortgage rates, and call that a closed case. But like many things in life, when you start to look a little closer, things get a little more complex.

To more accurately measure the increased pressure on households created by rising rates, we will compare mortgage rates at the start of a rate hike cycle and at their peak. For the current rate hike cycle, we will run through several scenarios based on various forecasts from economists and also market prices.

This will be based on the relative percentage increase in interest payments rather than the overall interest rate movement. After all, a 1% rise in rates in 1989 only increased interest payments by 6.25%, compared to 37.8% today.

But before we get to the main event, it’s worth exploring which of the rate hike cycles over the 63 years of comparable data accounts for the largest relative increase in mortgage repayments.

It may not seem like it at first glance, but the largest relative increase in interest payments was in fact the cycle of rising rates between 2002 and 2008, during which they increased by 58 .5%.

It should be noted, however, that this cycle of rate hikes took place over a six-year period, rather than the one to two years that defines the other examples.

In contrast, during the cycle of rising rates that led to interest rates of 17% in 1989, interest payments increased by 25.9%.

There are other measures that illustrate the challenge that 17% mortgage rates presented to households at that time. But in terms of the relative increase in interest payments over the 1988-89 rate hike cycle, it’s about in the middle of the data set.

How high will rates go this cycle?

The current range of economists’ predictions of when the cash rate will peak is arguably the widest ever, with forecasts ranging from a terminal rate of 1.6% to 3%.

Westpac – Chief Economist Bill Evans is one of the nation’s most respected monetary policy tea leaf readers. According to him, the spot rate will peak at 2.25% in 2023.

Commonwealth Bank – Among the country’s big four banks, the CBA predicts the lowest peak in the RBA cash rate at just 1.6% in early 2023.

ANZ – On a long-term time horizon, ANZ’s head of Australian economics, David Plank, estimates that the cash rate will peak somewhere north of 3% around the middle of the decade. For the purposes of today’s comparison, we’ll call it a 3% even rate.

NAB – Chief Economist Alan Oster believes the RBA will gradually raise rates as he assesses the impact of higher rates on households and businesses, forecasting a peak of 2.6% by 2024.

The market – The RBA Spot Rate Futures Market is pricing in the largest rate hikes of the five sources covered here today. With a cash rate of 2.85% expected by the end of the year and a peak rate of around 3.56% towards the end of 2023.

How do these predictions compare to past rate hike cycles?

Only the Commonwealth Bank scenario of a maximum cash rate of 1.6% falls below the 2002-2008 rate hike cycle in terms of the relative increase in mortgage repayments, with repayments increasing by 56, 8% versus 58.5% during the previous peak rate cycle. .

From there, it only gets harder for mortgage holders, with interest payments expected to increase between 81% and 109% depending on which major bank interest rate scenario you use.

At current market prices, interest payments on the average homeowner’s mortgage would increase by 125%.

In short, Australians have never seen interest payments on their mortgages rise so much in a single rate hike cycle, making this a truly unprecedented event if one of the big picture scenarios banks was realized, with the exception of the Commonwealth Bank.

There is no doubt that the late 1980s and early 1990s presented a very difficult environment for mortgage holders, many of us grew up with tales of the need for sacrifice during this time of from our parents.

But solely on the basis of how much interest payments are expected to increase, the potential challenge ahead for existing mortgage holders is something else entirely.

Ultimately, tough times are ahead for mortgage holders and perhaps a ceasefire in the intergenerational battle is warranted. While this battle will likely never be fully settled, today’s mortgage holders may have more than enough challenges to regale their children and grandchildren when they reach the age of those who have. experienced interest rates of 17%.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator