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Back in 2004, the standard variable mortgage rate was about 6.6%. Mortgage rates peaked at 8.85% in late 2008, before the RBA saw the light. Since then, it has been a straight line down to around 4.5%.

The home price Index (ABS: Residential Property Index) in 2004 was at 60.9. The index as at June 30th this year is 152.10, a 150% increase. Not all of that increase in home values has flowed through to mortgage payments because of the drop in interest rates.

We can construct an index, starting with a $500k loan and index that loan value by the home price index. Using the standard variable loan rate, you can calculate the monthly payment based on the current value of the indexed loan, the current interest rate, and all based on a 25-year principle and interest loan.

It shows that monthly mortgage payments have risen from $3,400 per month to $6,960 per month, which is more than double. Average weekly earnings have “only” increased by 60% (ABS release: 63020010), hence the clear squeeze the average person is experiencing with housing affordability.

Whether the starting loan is $500k or $250k, the pattern would remain the same

The growth in mortgage payments has clearly slowed since September 2017 but is still a constraint in relation to the household debt to income ratio. Should interest rates increase from 4.5% to 6.5%, mortgage payments would rise by a further 20% per month.

Although there are no signs of the RBA lifting rates, the US have lifted their 3-month interest rate by 1.15% over the past year, with more rate rises expected. Higher US interest rates will probably lower the Australian dollar, given investors’ preference of chasing a growth story and a better return on their cash. A lower Australian dollar will put pressure on increasing import prices, and therefore inflation and consequently the likely hood of higher interest rates.