We haven’t seen interest rates rise so rapidly in almost 30 years.
The RBA raised the official cash rate by 0.25% in May, the first time it had done so since November 2010. Since then, it has raised the rate each quarter – including four supersized increases of 0.5% each.
As a result, the RBA has increased the cash rate from 0.1% to 2.60% in just six months.
It has been 28 years since the RBA raised rates anywhere near this aggressively.
During August and December 1994, the official rate rose from 4.75% to 7.5%, which resulted in Australians paying an average mortgage rate of 10.5%, compared to 8.75% in August.
Compared to today’s levels, these amounts seem absurd. For instance, a 25-year principal and interest mortgage for $1 million would be $9,442 in monthly payments at an interest rate of 10.5%, compared to $5,558 at a rate of 4.5%.
Can we learn anything from 1994’s rate increases? And what’s different – or the same – today?
What was the reason behind the RBA’s 1994 rate increase?
When we look back on the early 1990s, many Australians probably remember a time of deep economic pain. As the then Treasurer Paul Keating explained, ‘this was the recession we had to have.’ Australia’s GDP shrank -3.9% in 1991, followed by a skyrocketing unemployment rate that peaked at 11.2% in 1992. Around the same time, Sydney house prices fell by approximately 10%.
By 1994, the worst of this had passed. The economy was growing rapidly (GDP increased 5.5% between March 1994 and September 1994) and unemployment was beginning to fall. The inflation rate also started to rise – it rose from 1.5% in March 1994 to 5.1% in September 1995.
Amidst this backdrop, people had begun borrowing more money for property, which raised concerns about prices rising too fast. As then-RBA Governor Bernie Fraser noted in August 1994:
“Housing loans 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.”
Then, what happened?
Several factors play a big role in house prices, as we’ve mentioned before. Because people have less money to spend when interest rates rise, property prices tend to stop rising as fast – sometimes they even fall, like today.
It took a couple of years for Sydney property prices to recover after the 1994 interest rate hikes.
Eventually, in 1996, they took off again, starting the longest property boom Australia had ever seen. Between 1995 and 2005, the median Australian property price rose at a yearly of 6%, compared to 1.1% in the 50 years from 1960 to 2010.
Amid all of this, the RBA began lowering the official cash rate – to 7% by mid-1996, to 5% by mid-1997, then to 4.75% by late 1998. It didn’t lift rates again until 1999.
Let’s fast forward to today…
Compared to the early 1990s, the factors that influenced rate hikes in 2022 have been slightly different. As a result of inflation, the CPI has already reached its highest level in 32 years, rising 7.3% in the September 2022 quarter. Compared to the mid-1990s, unemployment is just 3.5% nationally and 3.4% in NSW.
Moreover, we’re dealing with official cash rates well below those of the mid-1990s: 2.6% is a long way from 7.5%.
Furthermore, we’re also much more indebted. The median Australian household debt doubled between 1995 and 2015, according to OECD data. That means an increase in interest rates should have a more profound effect on people’s spending capacity.
That may be why property prices in Sydney, the country’s most indebted city, dropped over 2022.
The interest rate rainbow isn’t over yet…
The mid-1990s taught us that interest rate rises aren’t always permanent, nor are their effects on the real estate market, no matter how harsh they seem at the time.
Real estate markets eventually find their level, people become more confident, and once they are assured that the economy is stable, they start transacting again so that prices increase.
Buying at such times – well before the market turns – is often the best deal. This is particularly true for buyers seeking to upsize, as well as long-term investors seeking to grow their investments. As a matter of fact, you are more likely to find and secure the right property during times like these – when the market isn’t so hot.
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.