1980s rates topped 20%, but inflation eased burden
If you think today’s mortgage rates are high, consider the plight of 1980s borrowers.
Reserve Bank data shows that the average rate charged by mainstream banks peaked at 20.5% in June 1987.
Infometrics chief forecaster Gareth Kiernan (pictured) noted that even looking back to 1913, “nothing [was] above 6.57%,” adding that “because the Reserve Bank data was an average, there were rates being charged that were higher,” RNZ reported.
Lending limits and credit rationing in the 1980s meant second mortgages were common, often with even higher rates.
“We started off under Muldoon’s price freeze with a mortgage rate of about 11%,” Infometrics economist Adolf Stroombergen said. “As you can imagine the increases to more than 20 percent were tough on cash flow, but great for equity as house prices were rising rapidly at the time.”
Real rates and inflation changed the picture
Kiernan cautioned against assuming today’s buyers have it easy, even though mortgage rates have recently dropped to about 4.75%.
“While the rates were high on a nominal basis, when inflation was taken into account, the real rate was much lower,” he said.
“Getting in the market was difficult initially because you had to devote a high proportion of your income on servicing the mortgage but after a couple of years, the real value of that debt was eroded because of inflation, and your income had gone up significantly. So, your repayments compared to your income were back to much more manageable levels… and the longer the high inflation went on, the easier it got right?”
Between the first half of 1982 and the first half of 1990, the Consumer Price Index rose 111%, while household incomes rose 104%.
“Mortgage payments for this buyer had dropped to just 7.7% of income by 1989, even though mortgage rates had almost doubled from their initial level to over 15%,” Kiernan said. “By the time a 1974 buyer was paying off the last of their mortgage in 1998, payments represented just 4.6% of income.
“A buyer in 1987 didn’t experience the same prolonged period of high inflation and income growth, but payments had still dropped from 48% of income to a much more manageable 32% by 1989.”
Today’s buyers: Lower rates, higher debt burden
Kiernan pointed out that people buying a house in 2021 faced repayments relative to income that were slightly lower than the 1980s peak.
“But the problem is, they’re saddled with this giant debt for the next 30 years and the value of the house is now 15% lower than it was when they bought it, as well. So, they’ve lost on both counts.”
Westpac chief economist Kelly Eckhold agreed that real interest rates matter most.
“It might not have felt that much different, the real interest rate is what people respond to,” Eckhold said. “When inflation is near 20%, people are expecting quite substantial wage rises every year.”
Despite these challenges, housing affordability has improved in 2025, with Cotality reporting lower mortgage rates, steady incomes, and a 17% drop in property values making homes the most affordable since 2019; the value-to-income ratio is now 7.5 and repayments absorb just 44% of median income.
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