Wednesday, March 03, 2010

History of Interest Rates

With all the media hype surrounding this week's 0.25% interest rate rise, I took the chance to take a quick trip down 'memory lane' - thanks to Google.

Click on the link below and check out the past 50 years worth of interest rates. I think you'll agree, compared to the late 80's and early 90's when base rates peaked at 17%, we're in a very positive position right now with loans at around 6.5%.

Anthony Toop, Managing Director.

© Toop Real Estate Group


Paul said...

Anthony, I DISAGREE with you. Interest rates might be a whole lot lower then rates during the late 80's & early 90's, however the average cost of a house relative to wages has at least doubled since the late 90's. So whilst rates have halved since the late 80's peak, the average cost of a house relative to wages has more then doubled during the same period. So to compare 'apples for apples' it would be fair to say that people are currently paying at least twice current interest rates ie. at least 13% which is not far off the late 80's early 90's peak. Most see RBA lifting another 75bps during 2010, so home loans will be going to around 7.5%, so twice 7.5% is 15% which is not far off peak rates during late 80's & early 90's. So when home loan interest rates appproach 8% its going to place huge pressure on the average person when house prices remain as high as they currently are. If home loan rates started to approach 10% then the property market will have significant problems and the property price bubble would likely burst thats if it doesn't burst beforehand.

Anthony Toop said...

Hi Paul,

This is a great email. I had the property Journo from Australian Financial Review, Scott Elliott with me yesterday and we brainstormed this email of yours as it brings up some fascinating issues.

In the meantime I have included for you the median prices for Adelaide from 1985, 25 years worth supplied to me by the REISA.

In 1985 when we started Toop&Toop it was harder to sell to a first home buyer than today…WHY?? In 1978 when I was selling in Tea Tree Gully it was even harder! Why??

I am going to gather some more info on wages and Scott and I also think that the change in the way money is spent may be a clue. So here are some thoughts.

I will give you an example. In the 1970’s when colour TV first arrived we were selling (my brother’s business at Toop’s Electrical in Peterborough) the top of the range colour TV’s for just under $2000, and European Greatz were $1500, I was earning $4,500 in the electrical shop. You would only pay slightly more today for a vastly superior TV. A Datsun top of the line was $5,500, and a 5yo Mercedes Benz in 1982 was $20,000, and today it would not be much more yet a superior car. Electronics, computers, cars and commodities basically have not moved with wages and have become a fraction of the price in comparison. In 1978 a really basic cooling only 2hp window mounted air conditioner was $1000, yet today a vastly superior split unit would be around say $750 today with remote control and reverse cycle.

We built a new 3 BR house for $35k in 1969, it was around 90squ meters one bath room, today a typical first home buyer would want 2 bathrooms and a family room with carpets and carport and landscaping all included, plus today we have imposed fixtures/costs with the likes of smoke detectors and highly regulated plumbing and wiring.

The other big shift is that in the 1970’s it was rare to have both Husband and wife earning similar money even if they were both employed, so household income profile was quite different. In the 1980’s it was still really hard for a single female to get a loan irrespective of her income and job security!!!! So much has changed.

As a real estate sales person, I can confidently say that it is so much easier selling to first home buyers today than in 1977, that is a fact. Notwithstanding my personal experience in selling real estate since 1977 at 19 years of age, I am struggling to prove that, and hence the great discussion about why.

There is an excellent paper that we have linked through to InsideStory on the changing values over the years and it factors 1% per year for improved quality, and at least 1% per year for increased size of houses…heavy going but an interesting read.

Thanks for this excellent question, love it!! Bring it on, makes all the blogging worth while.


YEAR Medians
1985 $72,200
1986 $73,500
1987 $74,500
1988 $80,400
1989 $90,400
1990 $97,200
1991 $103,900
1992 $108,300
1993 $111,200
1994 $113,500
1995 $111,500
1996 $110,000
1997 $113,500
1998 $118,600
1999 $125,700
2000 $134,500
2001 $150,000
2002 $176,000
2003 $220,000
2004 $255,000
2005 $275,000
2006 $285,000
2007 $326,500
2008 $362,000
2009 $365,000

Paul said...

Hi Anthony, well your median house price stats speak for themselves. They have effectively tripled in past 10 years whereas the median wage has less then doubled. So in the last 10 years we have gone from paying around 3 to 4 times median wage for an average house to around 7 to 8 times mediam wage for an average house whereas interest rates are only slightly less then 10 years ago, so housing has become extremely unaffordable during the past 10+ years. Will the mediam house price continue to rise to 9 or 10 or 11 or 12 times mediam wage? I doubt it because eventually the average person will have no wage left to pay for gas, electricity & telephone bill's! so I think we are at or close to the peak in average property prices unless wages rise dramatically. I think the best case scenario is that property prices remain stagnant for several years whilst wages catch up, however as shown by the GFC, financial markets are not efficient and tend to overshoot on the upside & downside, so one should not rule out a bursting of the great Australia property bubble at some point. I'm currently renting a top end property for about 2.5% yield (compared to current home loan rates approaching 7%) with no council rates, no SAwater rates, no house insurance, no property maintenance, and in the meantime hesitantly thinking about buying back into the top end market where I run the risk of losing alot of mulla if & when the bubble bursts. Regards, Paul.

Anthony Toop said...

This is a common discussion point, and history will be the judge.
I really appreciate the discussion, and I hope to pursue your thinking,