Amid all the commentary on the housing market right now, many older generations point out that interest rates aren’t nearly as high as the double-digit rates they lived through in the past. But how do today’s rising housing costs really compare with the historic levels seen from the 1970s onwards?
The Bank rate is currently 3.00% following a 0.75% hike by the Monetary Policy Committee on Thursday 3rd November, still nowhere near the peak of 17% reached between November 1979 and July 1980. However, while interest rates are lower today, the scale of house price growth and the high levels of mortgage debt taken on by households since the 1980s means that fairly limited base rate rises – when compared to historic standards – have the ability to apply significant pressure to household finances.
As a rough rule of thumb, a rate increase of 1.0% today exerts about twice the pressure on the finances of a mortgaged household as the same rate rise would have done a decade ago. When compared to a rate rise of this size in the 1970s and 1980s, a 1.0% rise now exerts about three times the amount of pressure.
The ratio between house prices and salaries is also much higher than it was in the past. In the third quarter of this year, the average single homeowner spent half (50%) of their gross salary on their mortgage payment, a huge leap from 33% in the same period in 2021.
In April 1980, when the base rate was at 17%, the average single homeowner was spending 66% of their gross income on mortgage repayments. However, house price growth and the scale of household indebtedness since then means that the base rate would only have to hit 6% today for a homeowner’s affordability to be squeezed to the same extent.
By October 1989, when the Bank rate was 14.88%, mortgage repayments took up 77% of an average single homeowner’s salary. Today’s base rate would have to be at 8% to exert a similar pressure on affordability.
In the third quarter of 2007, in the midst of the credit crunch, the Bank rate was 5.5% and the average homeowner was spending 52% of their pre-tax salary on their mortgage. Households today are more indebted than before, so the equivalent base rate today would only need to rise to 3.5% in order for 52% of someone’s income to be spent on their loan repayments. Given all of this, we think policymakers are likely to keep increases to interest rates modest by historic standards, meaning we’re probably getting close to the end of the hiking cycle.
