Wow, what a wild slide

I'd like to see what'd happen tomorrow if we returned to the heady days of the 80's of 10%+ interest rates and today's level of gearing.

 

It'd be time to feast on all the juicy properties becoming available

 

It would not be smooth sailing ,as all the legal battles would start over why the money was lent in the first place..

 

If you want to see the average size debt just mirror image that graph.

 

We lived through the days of 18% interest rates. What people fail to mention is that underlying inflation was running at around 10%. Property prices were increasing quite rapidly as were incomes and wages. We were also receiving close to 20% interest on money deposited in cash management accounts at the Big 4 banks.

And not everyone paid 18%.

As the rates climbed, loans from Savings Banks (PPOR only, 65% maximum lend) were capped at 13.5%. The loans from Building Societies, Trading Banks and Finance companies (for those who couldn’t get a coveted Savings Bank loan, or for IPs) climbed to the dizzying limits of up to 21%.

The highest we paid was 16% from a finance company for an IP.

Deposits were higher, so after the first year or two most were sitting on solid capital gain. The main aim in life was to pay down that mortgage.

It was a wild ride.
Marg

 

Compared to now, they were horrific economic conditions back then (90/91). High inflation and a national unemployment average of 10%+ as well.

Even with all of that going on, we still didn't have a national residential property crash.

 

The hardest part “back then” was actually getting the deposit together. Most took a couple of years while renting. The desired lower interest Savings Bank loans required a 33% deposit, lending capped at $12,500.

House prices probably reflected the current buying conditions, as they do today.
Marg

 

Surely house prices were subdued by government spending on houses (massive spend by the Fed Govt in 1989) and difficulty taking on debt (had to have a 20% deposit; hard for singles to get a mortgage) combined with higher interest rates and cheap rent kept low by government investment in public housing.

 

excellent point

 

There was no crash because house price never boomed in the first place. Subdued lending kept things under control. House prices basically rose with inflation, running around 10% p.a.
Marg

 

That's right @Marg4000. 10% inflation, 10% unemployment, 18% interest rates and we still survived.

I know our debt levels are historically high at the moment, but so are the asset values. These days you get intense speculation from the media whether interest rates will go up or if unemployment increases by .1%. And with this come the scaremongers saying there will be a national property crash.

 

A lot of people counted on the mining boom lasting for ever also but didn't they get that wrong.

 

I was looking at a graph the other day, I think it was a link from here somewhere and it showed Australian house prices hardly move in the 8-10 years after 1989,unless I read it wrong
Then in the late 90s it really took off , and has never really looked back.

 

Correct.
There wasn't any upward movement in any way during the early 90's - except for the rate of unemployment.

 

Same same, just different day, hour and minute.

 

Going on remembory alone, but I had a unit in Perth at then start of the 90's, didn't do much for 8 years or so, but yield was reasonable

 

I can remember buying my first house in 1989 and getting a loan was really tough. Credit was in short supply and qualifying, particularly on one income was very difficult. There was no IO option to make serviceability easier.

Bottom line, if you qualified for a loan back then you were likely in pretty good position financially and your leverage was limited. Also don't forget Australia actually had wage growth back then and long term inflation does ultimately decrease the real dollar value of debt.

There is no comparison with today given the sheer amount of debt out there. Until APRA tightened credit was relatively easy to obtain. A lot of investors are leveraged to the back teeth, that is undeniable.

When I was on 18% interest I was pretty confident that interest rates would eventually go down and of course they did. If you can service a loan at 18% then servicing it @ 10% is a walk in the park. In contrast to now when really the only direction for interest rates is up. Even if Australia's inflation numbers stay in the toilet and the RBA does lower in response how much lower can they go? 0.25 or at best 0.5, then what?

Also the banks cost of funding is going up. Each time the Fed raises the US rate it increase the banks cost of funding and increases the pressure on other central banks to follow suite. Out of cycle rate increases by our banks are pretty much inevitable in this circumstance. The other potential is the threat to our AAA rating. The banking royal commission and the probably company tax cuts, all have the potential to impact the AAA.

I believe that all investors have to factor in a likely rise in interest rates by the banks at some time in the next 12 months. That coupled with a drop in property values would make for a precarious position for many of us.