House Price Vs Wage Growth

There has been lots of discussion in the media about the disparity between the growth of house prices in a period of stagnated wage growth, and for good reason – there is a very real gap between the rise of each that can’t be ignored and will eventually drive change to both.

Comparing the wage price index with property values for the past two decades shows that nominal dwelling value growth has vastly outstripped the total change in wages and salaries. While wages increased 81.7% in the past 20 years, Australian home values have grown 193.1%. This has been further exacerbated by the recent upswing in national housing values, which has seen Australian dwelling values rise 22% in the past 13 months.

What are the implications of relatively low wages growth relative to house prices?

Firstly, when house prices accelerate faster than incomes, it is harder to accumulate a housing deposit for a mortgage.

In the year to October, CoreLogic reports a 20% deposit on the median Australian dwelling value has increased by $25,417, to a total of $137,268. With wages increasing just 2.2% in the year to September, it is difficult for household savings to keep up with this kind of increase. This tends to lead to less demand from first home buyers through periods of rapid property price increase.

Secondly, is lower purchasing power when it comes to mortgage serviceability over time. The portion of income paid to service housing debt has stayed relatively low and steady over time because of low mortgage rates. However, low inflation and wages growth means that households cannot pay down their mortgage as easily or quickly. This is particularly burdensome for relatively new mortgage holders, taking on long loans of 30 years, especially if mortgage rates rise.

In the near term, wages growth will also be a key indicator to watch when it comes to movements in the trajectory of the housing cycle. That is because movements in wages and inflation will influence the cash rate, which is a key determinant of mortgage rates. A higher cash rate would likely put downward pressure on housing prices; however, at this stage the RBA maintains that this is unlikely for 2022.

In summary, if housing prices were to decline off the back of rising interest rates and in an environment of rising wages, new opportunities may occur for first home buyers to accumulate a higher deposit. Recent home buyers may take a hit to their equity levels – but would hopefully also have greater capacity to service their mortgage through wage increases, so any negative would be balanced out in this way.

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