What happens when house price growth exceeds wage growth?

Eliza Owen, head of research at CoreLogic, said the 2.2% increase indicates a return to pre-pandemic wage growth, and is just short of the decade’s average growth 2.4%.

She pointed out that when the WPI is compared to property values ​​over the past two decades, it becomes clear that the increase in nominal housing values ​​has far exceeded the total growth in wages and salaries.

Ms Owen reviewed the past 20 years and noted that although wages have risen 81.7%, property values ​​have far exceeded this growth, now on the rise. 193.1 percent from 2001 prices.

The recent spike in national home values ​​resulting in a 22% increase in property values ​​over the past 13 months has further complicated the situation.

Further analysis of CoreLogic data shows Tasmania has experienced the greatest disparity in growth rates over the past two decades, highlighting a 300% increase in property values. Residents of Tasmania saw a WPI of just 84 percent over the same period.

ACT, Victoria and NSW had the next largest difference in growth rates over 20 years.

Compared to other states, the Northern Territory has recorded the lowest disparity between wages and house price growth over the past two decades. It reports a 99% increase in home values, while WPI is now up 81.7%.

Ms. Owen said this is because the Northern Territory “tends to have a well-paid transitional workforce in the resource sector. Over the past 20 years, this has translated into sharp wage increases amid periods of heightened activity in the resource sector, but not so much continued demand for housing across the land.

The wage price index as a key indicator of housing market performance

The fact that incomes rise at a slower rate than house prices has a number of ramifications. For starters, when house prices rise faster than wages, it becomes more difficult to save for a down payment on a house.

Imagine this:

A 20 percent deposit on the median Australian home value rose $ 25,417 in the year through October, bringing the total to $ 137,268.

It is difficult for household savings to keep up with wage growth of just 2.2% in the year ending September.

What does this mean for home buyers?

Ms Owen said cases of rapid increases in house prices tend to lead to a drop in demand among first-time buyers.

In addition, low purchasing power, with respect to the term of mortgage loan service, is another key consequence of high house prices relative to slow wage growth.

Due to low mortgage rates, the percentage of income used to service mortgage debt has remained relatively stable over time. But low inflation and rising income make it harder for households to pay off their mortgages as soon as they want.

This is all the more difficult for new mortgages who take out 30-year loans, especially if interest rates rise.

“Higher wage growth, which tends to coincide with higher inflation levels, erodes the real value of mortgage debt, making it easier to repay,” Ms. Owen said.

Therefore, wage growth will be an important indicator to watch in the near term when it comes to changes in the trajectory of the housing cycle.

This is because changes in wages and inflation will impact the cash rate, which is a key determinant of mortgage rates.

In a speech of the 16 November, Reserve Bank of Australia (RBA) Governor Philip Lowe said annual wage growth could serve as a signpost for the kind of long-term inflation needed to justify a rate hike.

Governor Lowe suggested that keeping inflation between the target range of 2 and 3 percent would require an annual increase in wage prices of 3 percent or more. A higher cash rate would certainly put downward pressure on home prices, although the RBA believes that is unlikely to happen in 2022.

This can be good news for first-time homebuyers, because if home prices go down due to rising interest rates and rising wages, they have a better chance of saving more money. for a deposit.

Ms. Owen acknowledged that recent homeowners may see their equity decline, but in the long run, they should be able to pay off their mortgages more easily because of the income gains.

What happens when house price growth exceeds wage growth?


Last updated: November 22, 2021

Posted: 23 November 2021

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About Robert Valdivia

Robert Valdivia

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