Rates Are Back at 2011 Levels. Here's Why It Feels So Different This Time

The Reserve Bank has lifted the cash rate to 4.6 per cent, its highest level since late 2011. If that number sounds familiar, it should. Rates sat at almost exactly this level back then, and Australians managed. So why does today's rate rise feel so much heavier?

The short answer: the rate is similar, but the housing market it's landing on is completely different.

A very different starting point

When the cash rate last sat above this mark in October 2011, the RBA was holding at 4.75 per cent and was about to begin cutting. Buying a home was a far cheaper proposition. According to Cotality data, the median house value in Sydney was roughly $599,000, in Melbourne about $473,000, and both Brisbane and Perth were sitting in the high $450,000s to low $460,000s.

Fast forward to today and those numbers look almost unrecognisable. Cotality's research director, Tim Lawless, notes that home values have more than doubled over the past 15 years while wages have grown by only about 49 per cent.

The numbers that matter

Here's how affordability has shifted between then and now, based on Cotality's figures:

•          Dwelling values to income: up from 6.5 times annual income to 8.7 times.

•          Share of pre-tax income needed for repayments on a new loan: up from around 36 per cent to about 51 per cent.

•          Household debt relative to disposable income: up from 161 per cent to 178 per cent.

In plain terms, a typical new borrower now hands over roughly half of their pre-tax income to the loan. That leaves far less breathing room when rates move, and it's why each 0.25 per cent increase is felt so sharply.

Why households are more exposed

Lawless points out that households are now much more sensitive to changes in the cost of debt, and that sensitivity is amplified by broader cost-of-living pressures. Bigger loans mean every rate rise costs more in dollar terms.

Interestingly, mortgage arrears remain relatively low for now. Many households appear to be tightening their belts, cutting non-essential spending and riding out the storm. But as Lawless cautions, that kind of resilience won't last forever.

The squeeze is also changing how people buy. Some are looking further from the city, while others are settling for smaller homes. Even buyers using the government's 5 per cent deposit scheme still have to prove they can service a 95 per cent loan.

What borrowers are doing about it

From what brokers across the industry are seeing, borrowers are getting practical rather than panicking. Common strategies include:

•          Trimming everyday spending: cooking at home, cutting back on takeaway and delivery, reviewing streaming subscriptions and shopping around for electricity.

•          Fixing part of the loan: some borrowers are locking in a portion of their mortgage for certainty. It's worth knowing that fixed rates currently sit above variable rates, so this is a trade-off rather than a free hedge.

•          Refinancing: moving to a sharper rate can take real pressure off repayments.

•          Using offset and redraw accounts more strategically: and making extra repayments where possible to build a buffer.

•          Borrowing below the maximum: many buyers are choosing not to stretch to their limit, and asking how their loan would look if rates rose further.

•          Reviewing assets: a few are even considering selling an investment property to reduce debt.

One more point worth making: with mortgages so much larger relative to wages than they were 15 years ago, many households now need two incomes to comfortably service a home loan. That's a major shift in how affordability works.

What this means for you

Nobody can predict exactly where rates go from here, and a fixed rate that looks smart today may look different in twelve months. What you can control is how prepared you are. If you're on a fixed rate that's about to expire, if your loan hasn't been reviewed in a while, or if you're planning to buy and want to know your true borrowing power in a higher-rate world, now is the time to have the conversation.

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.