We were young (25), our total joint income was $A12,000 a year. Inflation was rife (9 percent in that year alone, 10 percent in the following year). Prices leapfrogged over and over, leaving wages behind. We were desperate to get into the housing market before it was too late.
Obstacles were huge. We had no deposit or savings record. It seemed pointless, since mortgage repayments were less than rent back then, and we had paid rent for years, thereby making saving impossible. I still don’t understand why paying rent doesn’t show financial reliability.
Mortgage rates were set at 3 percent in those days before the $A had a floating exchange rate, but banks were not lending. Banks were not our friend. Our only option was to borrow from a non-bank lender, at 11 percent. And that wasn’t easy either. We applied to four different building societies before we could find one that would lend against my income — the others wouldn’t take the wife’s income into account, and without it we wouldn’t have had enough.
My grandmother gave us some money, $3000, a generous gift. To make up the rest of our deposit, we took out a personal loan from a credit union. In those days, banks didn’t know everything about everyone’s money like they do now, or perhaps they just pretended not to know.
So here’s how it ended up: we paid $40,000 for our three bedroom townhouse (a row house) in a medium density development, all to be repaid over 20 years at 12 percent per annum interest rates plus capital, based on our income of $12,000 per annum. Our repayments were about 40 percent of our gross income. Difficult enough. But the 11 percent interest rates became 12 before we even moved in, and rose to 14 over the next couple of years. It never got easier.
Why didn’t we choose a fixed interest rate? Because they weren’t available. It was variable rates, at the lender’s discretion, or nothing. Also, this was all out of our after tax income. In Australia housing is only subsidised through the tax system for investors, not owner-occupiers.
In 1989 we sold that house and bought another larger one for our family. Interest rates rose to 17 percent on our new larger loan. Perfect timing. Just before we lost our jobs in the early nineties recession (unemployment then was over 10 percent).
Not until 1996 did interest rates fall back to 10 percent. By the time we paid our mortgage off in 1998 (19 years after we started) it had at last dropped to 9 percent.
So all you Gen X and Y people just don’t care? You think I’m playing the world’s smallest violin? You still think we boomers had it easy?
You should care. Part of the high prices you face for houses now comes from the massive costs we had to pay in interest, and then from the inflation of the 1980s that we coped with every single time we shopped for groceries. Sure, the house looked cheap, but the total once interest was added in wasn’t cheap at all.
I never want to see another discussion of relative housing disadvantage that doesn’t look at ALL THREE ELEMENTS: house price, income, and interest rates. Discussing any one or two of these is just cherrypicking.
Does that mean I think young people now have it easy? Absolutely not. The employment situation for young people is dire. But it won’t get any easier by fooling yourselves that your situation is uniquely terrible, or that back in the day baby boomers just walked into home ownership without sacrifice.
[Feature image licenced from iStockphoto, townhouse image P Kelley]