Photo: Stuff/Kathryn George
If you thought the seven percent-ish interest rates of recent years were tough, spare a thought for 1980s borrowers who paid the country’s highest interest rate on record.
Reserve Bank data back to 1964 shows the average of rates being charged by mainstream banks tops out at 20.5 percent in June 1987.
Infometrics chief forecaster Gareth Kiernan said data he had for the years before 1964, back to 1913, showed nothing above 6.57 percent.
He said because the Reserve Bank data was an average, there were rates being charged that were higher.
Lending limits at that time and credit rationing also made second mortgages common in the 1980s, which had rates that could be a couple of basis points higher again.
His colleague Adolf Stroombergen said he paid a mortgage rate close to 23 percent at the time.
“We started off under Muldoon’s price freeze with a mortgage rate of about 11 percent. As you can imagine the increases to more than 20 percent were tough on cash flow, but great for equity as house prices were rising rapidly at the time.”
But Kiernan said people should not assume that meant buyers of today had it easy, with mortgage rates dropping to about 4.75 percent in recent weeks.
He said while the rates were high on a nominal basis, when inflation was taken into account, the real rate was much lower.
“Getting in the market was difficult initially because you had to devote a high proportion of your income on servicing the mortgage but after a couple of years, the real value of that debt was eroded because of inflation and your income had gone up significantly.
“So your repayments compared to your income were back to much more manageable levels… and the longer the high inflation went on, the easier it got right?”
He said between the first half of 1982 and the first half of 1990, the CPI rose 111 percent, while household incomes rose 104 percent over the same period.
People buying a house in 2021 had faced repayments relative to income that were slightly lower than the 1980s peak.
“But the problem is, they’re saddled with this giant debt for the next 30 years and the value of the house is now 15 percent lower than it was when they bought it, as well. So they’ve lost on both counts.”
Chief economist at Westpac Kelly Eckhold.
Photo: Newshub
Chief economist at Westpac Kelly Eckhold agreed the real interest rate was the most important factor. This reached more than 10 percent in about 1984, but then fell away to almost zero at points in the late 1980s, before picking up again and remaining near 10 percent through much of the 1990s.
“It might not have felt that much different, the real interest rate is what people respond to. When inflation is near 20 percent, people are expecting quite substantial wage rises every year.”
Kiernan said a buyer in 1974 would have experienced consumer inflation of 13 percent over the next 15 years, matched by similar growth in incomes.
“Mortgage payments for this buyer had dropped to just 7.7 percent of income by 1989, even though mortgage rates had almost doubled from their initial level to over 15 percent. By the time a 1974 buyer was paying off the last of their mortgage in 1998, payments represented just 4.6 percent of income.
“A buyer in 1987 didn’t experience the same prolonged period of high inflation and income growth, but payments had still dropped from 48 percent of income to a much more manageable 32 percent by 1989.”
But buyers in 2022 faced the prospect of a much higher proportion of their income going on mortgage payments throughout the life of their loans.
Sign up for Ngā Pitopito Kōrero, a daily newsletter curated by our editors and delivered straight to your inbox every weekday.
