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COMMENT

Today's housing crisis is worse than the 17pc home loans of the 1980s

Caitlin Fitzsimmons

"But we paid 17 per cent interest on our mortgage!"

This line is often wheeled out by older generations to explain why younger people don't really have it tough in today's housing market.

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Sukkar: Get a 'highly paid job'

Michael Sukkar, a Coalition MP assigned with the job of tackling Australia's housing affordability problems, offers his advice on how to get on the property ladder.

It's rubbish.

It's quite true that interest rates rose rapidly in the late 1980s. The advertised rate for home loans hit 17 per cent in June 1989 and stayed there until March 1990, according to Reserve Bank records. It's also true they were in the double digits for most of the 1980s.

I don't doubt it was painful for anyone paying a mortgage at the time.

I don't know what it's like to wake up every few months and find interest rates have been hiked again. I don't know what it's like to take a second job just to keep a roof over my head.

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I do know what it's like to wake up every few months and find that prices have gone up by another $20,000. I know what it's like to spend months going to auctions and be constantly pipped to the post by Baby Boomers adding to their investment portfolio. Like many housing "haves" of my generation and younger, we finally succeeded only because of help from family, and I am truly grateful.

The truth is every generation has its challenges, but younger Australians definitely have it tougher when it comes to housing affordability.

It's often pointed out that the ratio of debt to income is higher than ever. In March 1990 owner occupier housing debt was 28 per cent of household disposable income, according to Reserve Bank figures. It has gone up steadily ever since and, as of September 2016, was 98.4 per cent. These are national figures and would be much higher in Sydney and Melbourne.

But let's consider the difference in interest rates between the 1980s and now. To do that we can look at a different measure: interest repayments for housing debt as a proportion of household income. This would include investment property.

When interest rates were 17 per cent, the proportion of household disposable income that went on the interest payments for the home loan was 6.1 per cent. It's currently 6.8 per cent.

That means a higher proportion of today's household incomes are going on mortgage interest payments than in 1989-1990, even though the advertised rates are now 5.25 per cent rather than 17 per cent. 

It was worse in June 2011 when the ratio was 9.4 per cent because advertised interest rates were higher, at 7.8 per cent. Since then property prices have surged 22 per cent in Melbourne and 40 per cent in Sydney, according to the Australian Bureau of Statistics. That's going to hurt if (when) rates go back up.

Even if mortgage repayments happened to be precisely the same proportion of your income, I would argue it's better to pay 17 per cent on a smaller debt than 3-4 per cent on a large debt.

Let me explain. Most mortgages are 25-30 years in duration, spanning a range of interest rate cycles. What matters most is how much money you owe, and the long-term average rates over the life time of the loan.

If you have a relatively small debt and interest rates are high, it will hurt for a while, but ultimately the rates should come down.

If you have a large debt and interest rates are low, it's likely interest rates will eventually go up and your principal will still be high.

It gets worse. If you buy a house in an era of low interest rates, and then rates rise, the market is likely to stagnate. So you'll be stuck paying off a high debt at higher rates, but it won't be offset by capital gain, at least for a while.

On the other hand, if you buy a house in an era of high interest rates, and then rates fall, the value of your property will usually increase because buyers have more purchasing power.

This is exactly what happened in the 1990s. When interest rates finally came down after the recession, home owners didn't breathe a sigh of relief and pocket the extra money.

Instead they collectively decided to upgrade their homes, and buy investment properties, and thus the housing boom was born.

If you managed to survive the 17 per cent interest era of the late 1980s, then by definition you were already a home owner by the time the 1990s housing boom rolled around.

The other thing that matters is wages growth. During the 1980s, inflation was high and wages along with it.

So even though interest rates rose throughout the 1980s, households were mostly able to absorb the expense because their incomes also increased.

Inflation and wages growth have been relatively low since the recession more than 20 years ago.

Baby Boomers, or indeed anyone who bought a home before 1990, have mostly benefited from being in the right place at the right time.

Research shows successful people tend to underrate the importance of luck in their success. 

Some beneficiaries of the housing boom think they deserve it, that it's the just reward for their hard work and thrift.

In reality it's a windfall gain.

And that's fine, no one is trying to take it away. But the appropriate response to a windfall gain is to acknowledge that it happened and act with gratitude rather than entitlement.

Many older people do feel grateful for their good fortune, and, of course, some older people have not benefited from the housing boom at all.

Yet, it's clear there is a lot of entitlement out there. Only last week we published a letter from a reader who, along with their spouse, owned more than $3.2 million in super and was worried they might lose their health care card as a result.

Last week I was on a panel discussion with the Grattan Institute's John Daley and financial commentator Peter Switzer on "why every generation feels entitled".

The thing is, I don't think it's true. Younger generations just want a fair go.

It's not entitlement to think it's a problem if the typical household can't afford a typical home. It's not entitlement to think that access to jobs and schools, not to mention social connection with family and friends, need to be part of the equation.

At the same time, most of us also think there are even more pressing issues – like meaningful action on climate change.

There is no greater entitlement than a planet that supports life.

Caitlin Fitzsimmons is editor of Money. Find her on Facebook and Twitter.

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