Australia house prices hugely outpace wage gains, CoreLogic says

SYDNEY (BLOOMBERG) – Australian property prices have heavily outstripped pay gains over the past two decades, driving up household debt and suggesting the future strength of wages is key to the housing market’s outlook, said a report by CoreLogic.

“That is because movements in wages and inflation will influence the cash rate, a key determinant of mortgage rates,” said Ms Eliza Owen, head of research at the property market consultancy, on Friday (Nov 19).

On the one hand, higher wages and faster inflation help erode the value of existing debt, Ms Owen said, while on the other, higher interest rates increase repayments, stretching the finances of Australian home owners with sizeable loans.

Reserve Bank of Australia (RBA) Governor Philip Lowe said this week that he would use wages growth as one of the “guideposts” in assessing whether inflation is “sustainably” within the central bank’s 2 per cent to 3 per cent target range. The RBA sees pay gains accelerating to 3 per cent in about two years, from 2.2 per cent at the most recent reading, opening the door to a potential rate increase in late 2023.

CoreLogic’s research underlines the importance of wages for monetary policy given Australian households are highly leveraged, with the nation’s debt to income ratio among the highest in the developed world. That leaves home owners vulnerable to rapid and sharp rate hikes.

One implication of skyrocketing house prices – 193 per cent in the past two decades at a time of when wages grew by a subdued 82 per cent over the same period – is difficulty accumulating a deposit to purchase, Ms Owen said. A 20 per cent deposit on the median Australian home rose by A$25,417 (S$25,098) to A$137,268 in just the year to last month, she noted.

Ms Owen said if the RBA begins its policy tightening cycle in earnest, this would exert downward pressure on housing prices, potentially making it easier for first-home buyers to get a foot on the property ladder. At the same time, she said, recent purchasers “would hopefully also have greater capacity to service their mortgage through wage increases”.

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