10.26.2022 Local News

Rising Interest Rates: What The 1990s Can Teach Us About Today

Rising Interest Rates: What The 1990s Can Teach Us About Today

It’s been almost 30 years since we saw interest rates rising this rapidly.

So what lessons do the rate hikes of the mid-1990s have for us today?

So far, 2022 has been a year of interest rate hikes. The RBA raised the official cash rate by 0.25% in May – the first time it had raised rates since November 2010. Since then, it has lifted the rate monthly – including introducing four supersized rate rises of 0.5% each.

In doing so, the RBA has taken the official cash rate from 0.1% to 2.60% in just six months.

The last time the RBA lifted rates anywhere near this aggressively was 28 years ago in the second half of 1994.

Between August 1994 and December 1994, it took the official rate from 4.75% to 7.5%. When this happened, the average standard variable rate Australians paid on their mortgage also went from 8.75% to 10.5%.

These levels seem ludicrously high compared with today – at an interest rate of 10.5%, the average monthly repayment on a 25-year principal and interest home loan for $1 million would be around $9,442. That compares with $5,558 on the same loan with an interest rate of 4.5%.

But are there any lessons we can take from 1994’s rate rises? And what’s different – or the same – about today?

Why did the RBA lift rates back in 1994?

Those of us who remember the early 1990s probably also remember that it was a time of deep economic pain for many Australians. It was, as then Treasurer Paul Keating told us, ‘the recession we had to have’. In 1991, Australia’s GDP shrank -3.9%. This was followed by skyrocketing unemployment, which peaked at an eye-watering 11.2% in 1992. Around the same time, Sydney house prices fell by approximately 10%.

But, by 1994, the worst of this was behind us. The economy was growing rapidly (GDP lifted 5.5% in the 12 months to September 1994); unemployment was slowly beginning to fall, and the property market had recovered. Inflation also started to surge – it went from 1.5% in March 1994 to 5.1% by September 1995.

Against this backdrop, people had started borrowing a lot more money to buy property, raising concerns that prices were rising too fast. As then-RBA Governor Bernie Fraser noted in August 1994:

“Housing loans outstanding have grown at over 20 per cent per annum for the past two years and cannot continue at this pace without creating unwanted pressures in the housing market and more generally.”

What happened next?

As we’ve noted previously, the amount people can borrow is one of the most important factors that determine house prices. When interest rates rise, this directly impacts people’s borrowing capacity and, because they have less money to spend, property prices tend to stop rising rapidly – sometimes, like today, they even fall.

After the 1994 interest rate hikes, Sydney property prices dipped slightly and stayed relatively stable for a couple of years.

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Then, in 1996, they started taking off again. In fact, this was the start of the longest property boom Australia had experienced. Between 1995 and 2005, the median Australian property price rose at an average of 6% compared with 1.1% in the 50 years from 1960 to 2010.

Interestingly, while this was happening the RBA began dropping the official cash rate – taking it back to 7% in mid-1996, then 5% in mid-1997 and 4.75% in late 1998. It didn’t lift rates again until late 1999.

Fast forward to today…

2022’s rate hikes have been impacted by slightly different factors from those of the early 1990s. This time, inflation is already ‘out of the bottle’, with the CPI rising 7.3% in the September 2022 quarter – its highest rate in 32 years. Unemployment is also much lower today than it was in the mid-1990s – at just 3.5% nationally and 3.4% here in NSW.

Most notably, we’re dealing with official cash rates well below those of the mid-1990s: 2.6% is a very, very long way off 7.5%.

On the other hand, we’re also much more indebted. Median Australian household debt doubled between 1995 and 2015, according to OECD data. That means, theoretically, any interest rate rise should have a more profound effect on people’s capacity to spend.

Perhaps that’s why we’ve seen property prices decline over 2022, especially here in Sydney, the country’s most indebted city.

There is light at the end of the interest rate rainbow…

More than anything, the mid-1990s show us that, no matter how harsh interest rate rises seem at the time, they don’t usually last forever, nor do their effects on the property market.

The real estate market finds its level, people eventually grow more confident and – once they’re convinced that the economy is stable – they begin transacting so that prices pick up again.

Our view is that many of the best buying happens in times like these – well before the market turns. This is especially true for buyers who want to upsize, as well as for long-term investors looking for capital growth. After all, it’s times like these – when there is not as much heat in the market – that you’re more likely to find and secure the right property.

With that in mind, our advice is to look to history, as well as to the future, and make your next move when it suits you, rather than waiting for when you think the market will turn.

Want more?

If you’d like to find out more about property in Sydney’s Eastern suburbs, get in touch with our team today.