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‘THINK MORTGAGE RATES are high now? They’re nothing compared to the 1980s.’
If you’re a prospective home buyer, you’ve likely heard or read some variation of this statement while looking on in anguish at constantly increasing mortgage rates.
While mainstream Irish banks have been slow to pass on European Central Bank rate hikes to customers, borrowing costs have still jumped over the last year.
For much of the last decade up to 2022, first-time buyers could avail of rates of between 2% to 3%.
But as of now, mortgage rates on loans for new borrowers have jumped to around 4.5%, with AIB and Permanent TSB both announcing recent price hikes.
With the ECB still struggling to get eurozone inflation under control, it’s likely the rates on offer for first time buyers will finish 2023 even higher again.
This increase of around 2% may not sound like much. Especially in comparison to historical interest rates, which were at double-digits throughout the 1980s.
Plenty of horror stories have been dug up recently of terrifying rates near 16%, which peaked in the early 1980s in Ireland and have been largely on a downward trend since.
There is no doubt many older homeowners struggled to buy decades ago. But the headline interest rate doesn’t tell the full story.
House buyers now tend to borrow much more compared to their peers in the 1980s.
This means interest rate rises have a much greater impact on how much money they have left over at the end of each month.
To illustrate this, Dara Turnbull, an economist for Housing Europe, looked at an example in detail for The Journal.
He took a ‘typical’ first-time buying couple in 1987 – two people aged under 35 with no children – and compared it to one in 2022. Old Irish pounds were converted to euros.
Both were assumed to be buying an average-priced home on a ‘typical’ wage using 10% deposit and a 25-year loan.
For the 1987 couple, this meant their gross income was just under €25,000 while the home they were buying was worth €42,700.
For 2022, their joint income was €83,000, while the home they bought was €331,000.
The 1987 couple faced interest rates of 11.3%, more than triple the average interest rate of 3.1% in 2022.
Despite this, the 2022 couple still ended up spending far more of their income on mortgage payments.
“In 1987, they would have been spending 17.4% of their average disposable income (after tax) on mortgage payments,” Turnbull said.
“For the couple in 2022, it would be 25.8% of their disposable income.”
So why is there such a big difference, despite the much higher mortgage rates for the 1987 couple?
A major one is mortgage interest relief. Until 2013, the state effectively subsidised mortgages. House buyers got relief to the tune of thousands of euro per year.
But this doesn’t fully account for the difference – the other big factor is how much more debt buyers in 2022 have.
Neal Hudson, the founder of housing consultancy Builtplace, said because houses are more expensive now relative to earnings, people have to take out bigger mortgages.
“The key thing is that people used to borrow about two times their income, but now it’s about 3.5, four times their income,” he said.
So when interest rates go up, it has a bigger impact on current buyers.
Hudson said this means it is essentially impossible for interest rates to return to the levels seen in the 1980s.
“If rates went back to 12 or 15%, you would be looking at a massive destruction of asset value,” he said, as repayments would surge and become completely unaffordable.
“Property values would fall and there would be a severe depression before you even got to double-digit rates.
Low interest rates are embedded into the market.”
Hudson and Turnbull both said how much disposable income is being spent on housing demonstrates the different world modern buyers face.
The example from Turnbull showed that even with a 3% interest rate, the modern couple would spend much more of what they earn on their mortgage compared to a buyer in the 1980s.
If the 2022 couple borrowed at an interest rate of 5%, their repayments would jump to almost €21,000 a year.
This works out at 31.5% of their after-tax income – far more than the 17.4% disposable income in 1987, despite the fact that interest rates were much higher.
This is a major difference between now and decades ago.
Modern households were already using more of their disposable income to pay for their home, even before the big round of rate hikes.
“In part, that’s because of the higher cost of housing generally,” Turnbull said.
“An average house bought in 1987 would cost about €80,000 now if earnings increased at the same rate, but of course the average price of a home isn’t anywhere near that. It’s also due to mortgage interest relief as well.
“Fundamentally, this generation compared to the previous one is paying more in mortgage costs.”
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Its all going to go belly up again.
Like a repeat of the boom, in almost every way.
@Gerard Carey: No 2 booms are the same are they? I wonder what the trigger will be for the next one. It’s always interesting. I had a friend back in the late 90s who constantly told everyone that there would be a crash, a real doomsayer and a downer to be around, and you know what, he was right, 10 or so years later. The unfortunate thing was he missed the boom and only got to suffer the crash like everyone else so his fortunes dipped further and failed to recover as well as in comparison to those who took advantage of what was on offer at the time, which was easy credit. In today’s world, let’s imagine you took a loan out for 50K over 10 years and invested it in stock like Microsoft 10 years ago rather than a car or an extension. Today, for every 25 bucks you had spent on that stock you would get back over 300 bucks, nevermind all the rest. Overall, you would pay 60K for 600K. Of course a world war could have broke out but it didn’t. In the once in a lifetime crash of 08/09 their stock went down to ~16 bucks. You could try saving up instead.
The main difference between 2023 and 1983 is employment. Today there is what is basically full employment. If yiu want a job you have one. In 1983 the only thing that was keeping unemployment between 10 and 15% was emigration.
@Sean O’Dhubhghaill: yes but you had a 40 hour week paid weekly today zero hour contracts shite wages and being paid monthly should be outlawed ,people in aldi, lidel have no 40 hour contracts from companies that make billions go ask for a mortgage and the bank will laugh at you
@john mac: if your on a zero hour contract at the moment you need to take your finger out, nearly every company in the country is looking for staff. If your in a shite job you hate now is the time to do something about it. Companies will to take staff with very limited experience and prepared to train staff as bodies are needed.
Big difference is when my parents got a mortgage in the 70′s one of them had a job and he worked like a dog for 10 years and had mortgage paid off as a general operator. 2 standard wage jobs won’t pay off a mortgage in 20 years now
@paul o sullivan: We do not acknowledge this statement. We advise you to reread our prepared statements presented in the above article. We advise you accept the facts we have prepared for you to accept.
The lending ratio was 3 times the main earner & 0.5 times the second earner, in ’91 when women where allowed to draw down mortgages in their own name (prior to this you needed a male guarantor to sign your mortgage) But a female got less than this headline rate because of our perceived higher risk in repayment of the mortgage. Then within 6/7 months of drawing down the mortgage the rates shot up from 6% to 14.5% (I got a 6 month stay on the 14.5% because I could not pay the higher rate).
I cut back on food, cloths, shoes, entertainment, no holidays for 4 years & walking a couple of stages so the bus fare into work was cheaper so I could pay the mortgage.
My point with this is everyone’s situation is different both in the 80′s/90′s and now, and is based on disposable income and how much of a cushion this allows you when prices spiral out of control, in both cases prices for everything where/are going up making the situation worse.
People lost their houses in the currency crises as its called and unfortunately will again but generational blaming just ignores the government housing policy (or lack there of) over the last 50 years.
Every generation has their dire financial crises and negating them because you don’t thing they were/are as bad as yours is not helpful for anyone and only causes resentment.
The EU central bank better be careful they don’t forget EU citizens with their attempts to draw back inflation. What just happened in France should be a warning
It’s a joke of a country I’m self employed and have steady income for the past 3 years asked the bank for 80k loan to buy a house had 30k saved up they said no its unreal this country myself and my missus packing our bags in 2 months and going abroad I had the perfect credit score.
@thanks for the beautiful music christy rest in pea: did you not try another bank?
Plus in the 80′s they didn’t have to pay the Fianna Fail tax introduced in the late 2000′s
@Shaun Gallagher: in the 80s income tax rates were far higher, and you received net far less of your salary than you do now even with USC
@Roj Blake: Do you work for the government, now that they don’t have RTE.
You never question anything. Just spout the same old thing, again and again. Everything is perfect???
Sorry, I gave you a thumbs up by accident.
@Donal Ronan: I work for myself and am damn glad taxes on work now are far less than they were in 1980s. Everything is not perfect, as dole is long overdue for reform, it needs to be time limited.
@Roj Blake: We thank you for your unending support as this is for the greater good. We also agree with your statements on appropriate taxation.
80% of all of the wealth in the country is tied up in property. It has become solely a commodity and store of wealth and multiplier of wealth. The fact that people need somewhere to live as a basic requirement has fallen away and comes in a long way behind the monetary considerations. This stores up massive problems for the future but also immediate ones and is why nothing really gets done to resolve the issue. People get a say once every 5 years at the ballot box to do something about it and that time is drawing near again. It’s why SF have gone out way in front in the polls. Not because of anything magical they have done. People just know now to for certain that FG/FF either can’t or won’t do anything about it or a mixture of both.
The 1980’s were much tougher times economically for young people. It was so difficult to get any job and you were lucky to keep it as companies were shutting down in their hundreds. Income tax was at 77% if you earned more than €250 a week. Unemployment was disastrously high. Emigration was chronic. Interest rates were 4 times what they are now.
This country today has plenty of good jobs, a booming economy, democracy and freedom but it has a lot of young people who dont know hard times but do know how to complain about nothing.
Ireland was a very different place back then, in many respects.
Interest rates are irrelevant in this comparison. The house prices and what’s borrowed are the relevant part. A house in the 80s is not comparable to today’s prices even after adjusting for time.
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