Eli5: why are interest rates now considered worse than higher interest rates of decades ago?

Question

I am surrounded by boomers saying this that in their day interest rates were at 15% and we have it easy! I’m also surrounded by the younger generations saying this is ‘not the same thing’

Explain to me the reasoning…

In: 233

Answer 1

Simplest way to look at this is how much % of your salary you take each month to pay your mortgage, it is really the key metrics,

This percentage was very high in the spike of interest in 80s (approx 40%) but has been very stable (ish) in the last 3 decades or so (approx 30%), as interest were moving down, home were hiking in price to compensate as people could pay more expensive (not better) house for the same monthly payment with lower interest rate

This has effect has been in full force for at least when interest rate were at 8-9% meaning for the last 30 years, from a monthly payment perspective house have been similarly price has when the boomer paid 8-9% in the mid 90s (30%)

Now, the interest hike we have now is bringing us in the range of the comparable of the 10-14% (range of 40% of take home pay in mortgage per month) they had, we are now in the exact same situation as they were when it was at it’s worse for them

So basically the only chart you need to show a boomer to explain this is the graph % of monthly take home pay spent on mortgage evolution in the last 50 years, it’s relatively easy to understand from that metrics instead of trying to compare house price and interest rate and inflation in an endless debate

Also, one could argue that the lower house price higher interest rate scenario was still better as it was far more profitable/easy to help your situation with unbudgeted cash influx towards the house when the house was 3x your annual salary then when it is 10x and the first down payment was easier to save for as well

Note this is all very average (the 30% and 40%) it represent the average middle class family/house in a generic averaged out market, there’s some market like Toronto that have been above the 40% since before the pandemic crazy house price hike and now the interest hike