The missing ingredient in Jack Cowin’s interest rate argument

The missing ingredient in Jack Cowin’s interest rate argument

Jack Cowin, who brought KFC to Australia, founded Hungry Jack’s and is Chairman of Domino’s Pizza Enterprises, recently shared his thoughts on interest rates:

“I was around in the 1970s when corporate interest rates were in the mid-20 per cent range, so this is a picnic. And in the 1980s or 1990s we had similarly high interest rates, so I’m somewhat bemused by the degree of concern people are expressing versus what it has been in the past…the reality is the sun will come up in the morning. The economy is cyclical, and things will rise, they will solve the problems, and the sun will come up.”

Whilst many older Australians would agree with Jack Cowin, there are two missing ingredients in his thesis, and the main one revolves around Australian’s insatiable appetite for debt. 

Firstly, as credit became “freely available” Australia’s consumer debt to disposable income ratio has increased four-fold from 45 per cent to around 180 per cent over the past four or five decades.

Graph 1. Australia household finances debt to income

Source: RBA

Second, the cost of an average property in a city like Sydney, despite the recent severe price retracement, has jumped from around three times pre-tax earnings to twelve times pre-tax earnings. The additional expenses associated with a potential university debt and childcare, as well as the cost-of-living crisis, has meant many relatively younger Australian’s are finding it difficult to “get ahead” whilst others are heading for financial despair, despite the fact the current interest rate structure is significantly lower than it was during previous peaks.

In the table below, I have compared the typical financial situation today with one of four plus decades ago and assumed a period where there is a single-family breadwinner.

Despite the fact the mortgage interest rate today is approximately 10.25 per cent or 60 per cent lower today than it was around the peak periods of 4 plus decades ago, the typical pre-tax income for a single breadwinner relative to the annual mortgage interest expense is at least one-third worse off, assuming a 60 per cent Loan to Value ratio.

If the bank of Mum and Dad isn’t open, it is certainly a tough period for many Australian families with a significant mortgage.

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Chief Executive Officer of Montgomery Investment Management, David Buckland has over 40 years of industry experience.
David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

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