Here’s why buying a home in Perth was far easier in the 1990s than it is now … even with 17 per cent interest

By today’s standards, the idea of paying 17 per cent on a mortgage sounds terrifying. But despite sky-high interest rates, buying a home in Perth in the early 1990s was significantly easier than it is now. Why? Well, the reason is simple: house prices were far lower relative to income, and the period of extreme interest rates was relatively short-lived, despite what your parents or grandparents may have told you. In the early 90s, the median Perth house price was about $100,000-$120,000. At the same time, the average Australian income was roughly $27,000 a year. That meant a typical house cost about four times the average annual income. Huge price changes Today, Perth’s median house price is about $800,000-$850,000, while the average income sits near $94,000. That means houses now cost close to nine times the average income — more than double the relative cost compared with the early 90s. This difference has had a profound impact on affordability, particularly when it comes to saving a deposit. In the 90s, a 20 per cent deposit on a typical Perth home was about $21,000. A disciplined saver putting aside 15 per cent of their income could realistically accumulate this deposit in about five years. Today, that same 20 per cent deposit is roughly $165,000. Even with higher wages, saving that amount could take closer to 12 years. In other words, the time required to save a deposit has more than doubled. In the 90s, interest rates did peak at extremely high levels, reaching about 17 per cent in 1990 — and for a time mortgage repayments were very expensive relative to income, but those extreme rates didn’t last long. Within three years, mortgage rates had fallen to about 9 per cent. By the late 90s, rates were closer to 6 or 7 per cent, which is similar to where they sit today. This rapid decline meant many homeowners only endured the worst rates for a relatively short period of time, typically between one and three years. As rates fell, repayments became much more manageable, even while property values began to rise. Mortgage explosion Another key difference is the size of mortgages. In the early 90s, a typical Perth mortgage might have been about $80,000. Today, it is closer to $650,000. This means modern borrowers are carrying vastly more debt, even though interest rates are lower. Higher debt levels increase financial risk and make buyers more sensitive to interest rate rises. Many people who bought in the early 90s also benefited from three powerful forces: interest rates fell significantly; real wages rose over time; and property values increased substantially. This combination made home ownership progressively easier after the initial purchase and the pain of high rates. By contrast, today’s buyers face much higher entry costs and much larger debt burdens. So, while interest rates were undeniably higher in the early 90s, the overall barriers to home ownership were far lower. House prices were much cheaper relative to income, deposits were far easier to save, and mortgage sizes were much smaller. And importantly, the period of extremely high interest rates was relatively short, with rates falling sharply within just a few years. Today, buyers face the opposite challenge. Interest rates may be lower than the peaks of the 90s, but house prices are far higher relative to income, deposits take much longer to save, and debt levels are significantly larger. In simple terms, though servicing a mortgage was briefly more difficult in the early 90s, getting into the market was far easier, and those who did were ultimately rewarded with falling interest rates, rising incomes, and strong long-term property growth. The biggest obstacle facing buyers today is not interest rates, but the sheer cost of entering the market in the first place. And let’s not forget another salient point: your parents and grandparents were able to buy houses for the average house price in a wide range of suburbs, including many suburbs that are now highly desirable. So if you’re berating yourself for not owning a property right now, take a step back, keep it in perspective, and understand what you’re up against. Because when you really break it down, Mum and Dad didn’t have it so bad after all. Jovan Cvetkoski is a financial adviser and director at Knight Group