RBA cash rate: 1 year on hold, 11 years since last hike

The RBA is set to leave the cash rate on hold when it meets tomorrow, marking one year since the last cash rate cut.

The cut, which took place on November 3, 2020, saw the official cash rate drop from 0.25 per cent to just 0.10 per cent.

RateCity.com.au data shows there were just 19 home loan rates under 2 per cent prior to the November 3 cut. Today there are 202, despite recent hikes to fixed rates.

Number of home loans under 2%

Source: RateCity.com.au. Note: 1 year ago is 1 November 2020. Today is 1 November 2021.

Sally Tindall, research director at RateCity.com.au, said record-low rates had fuelled a white-hot property market. 

“In June 2020, one lender threw down the gauntlet with the first home loan rate under 2 per cent. Today there are over 200 loans starting with a ‘1’, despite the recent hikes to fixed rates,” she said.

“The surge in home loan rates under 2 per cent since last November helped set the property market alight and in doing so, has widened the gap between those already in the market, and those priced out.

“In the last 12 months, the average house price has jumped $350,505 in Sydney and $162,138 nationally – that’s a significant hurdle for young families trying to get a foot on the property ladder.

“The eye-popping property price rises over the last 12 months aren’t likely to continue into 2022 at the same pace, with fixed rates already on the rise and renewed speculation a cash rate hike will come earlier than 2024.

“APRA is also at the ready to reign in the number of households head over heels in debt, with its new 3 per cent serviceability buffer due to kick in from today, along with a threat to take further action if needed,” she said.

11 YEARS SINCE THE LAST CASH RATE HIKE – ARE AUSTRALIANS PREPARED? 

November 2010: Wayne Swan was Treasurer, Prince William and Kate Middleton got engaged and Americain won the Melbourne Cup. It was also the last time the RBA raised Australia’s official cash rate. The move was a 25-basis point hike to 4.75 per cent.

RateCity.com.au analysis shows that in every city except Sydney and Hobart, the monthly repayments on a median priced house with a 20 per cent deposit are actually lower than 2010 levels. Yet in most cities house prices have soared, with the exception of Darwin and Perth, forcing families to take on increasing levels of debt.

For example, someone buying a median-priced house in Sydney today with a 20 per cent deposit is paying 115 per cent more than someone buying the same house 11 years ago. In doing so, they are taking on $571,686 more in debt. In that time, the average household income (1.5 times full-time wage) has increased by 39 per cent.

Despite this astronomical rise in loan size, the mortgage repayments for a new home buyer are only 18 per cent higher compared to the repayments for someone buying 11 years ago due to falling interest rates. 

Buying in Sydney – then and now

Based on a family (1.5 times the average wage) with a 20% deposit,

Source: RateCity.com.au, see notes at end.

Buying in Melbourne – then and now

Assumes a 20% deposit

Source: RateCity.com.au, see notes at end.

Note: debt-to-income ratios of six or more are considered risky by APRA. Households that spend over 30 per cent of their pre-tax income on the mortgage are considered to be in mortgage stress (does not apply to high income households).

Sally Tindall said: “These days it’s hard to imagine paying a rate of 7 per cent on your mortgage, but back then it was a relatively standard ask. Rates were down from the pre-GFC levels – the yard stick was completely different.”

“Since November 2010, mortgage rates have plummeted, boosting people’s borrowing capacity while largely keeping a lid on mortgage repayments,” she said.

“However, falling interest rates can be a double-edged sword. Increasing property prices have seen many families take on escalating levels of debt without a corresponding wage increase.

“The latest property exposure statistics from APRA show 21.9 per cent of new lending is now deemed risky by the regulator, with a debt-to-income ratio of six or more.

“While a cash rate hike earlier than 2024 would put the brakes on the property market, it could also catch many existing homeowners out, particularly anyone who’s had a recent change in circumstance or maxed out their borrowing capacity.

“The RBA is going to want to see material proof people can afford a rate hike well before they pull the trigger on one.

“While the timing on the next cash rate hike is still unclear, people can start protecting themselves from the financial stress of a rise by getting ahead on their repayments now.

“The smaller your loan is when rates do rise, the less pain you’ll feel,” she said.

Tips for home buyers

• Start small: If you’re starting out don’t expect to buy your dream home straight away, buy something you can afford.
• Set a price limit: don’t rely on the bank to tell you what you can afford to borrow.  Think about how much debt you’re comfortable taking on. 
• Avoid mortgage stress: Mortgage stress is considered to be when low- and medium-income households are spend more than 30% of their monthly pre-tax income on housing costs.
• Keep a rainy-day fund: Roofs leak and pipes burst, so make sure you have a rainy-day fund ready to pay for unexpected costs associated with your new property.

Buying property around Australia – then and now

Assumes a 20% deposit

Notes

• Scenarios are based on owner-occupiers paying principal and interest repayments.
• House prices are from CoreLogic Hedonic Home Value Index Results (October 2010, October 2021).
• Income is based on the full-time adult average weekly ordinary time earnings by state from the ABS (May 2010, 2021) using original data. A family income has been estimated at 1.5 times this wage. 
• Average rates are based on 3-year fixed for new owner-occupiers paying principal and interest from the RBA (October 2010, and September 2021).
• Monthly repayments are based on someone paying principal and interest on a 30-year loan with a 20 per cent deposit. Assumes stamp duty is paid upfront.
• Debt-to-income ratio is based on the loan size and the households’ total gross annual income. Debt-to-income ratios of 6 or more are considered risky by APRA.
• Monthly repayments to income is based on gross monthly income. Ratios of over 30% are considered to be in mortgage stress (excludes households on high incomes).

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