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How big is the gap? How rising house values compare to wage growth

House values have risen at more than double the rate of wage increases over the past two decades, according to recent analysis by CoreLogic.

In a report compiled for CoreLogic’s Property Pulse, head of research Eliza Owen noted wages had increased 81.7 per cent since 2001, while Australian home values had vastly outstripped them, growing by 193.1 per cent in the same period.

“This has been further exacerbated by the recent upswing in national values, which has seen Australian dwelling values rise 22 per cent in the past 13 months,” Ms Owen said.

Where the gap bites the hardest

In some parts of the country the discrepancy between wages growth and house values has been particularly severe.

In Tasmania, for example, Ms Owen noted property values had risen 300 per cent in 20 years, compared to a wage price index increase of 84 per cent.

“The next largest gap in the 20-year growth rates were across the ACT, Victoria and New South Wales,” she wrote.

Meanwhile, the gap between wage price growth and house value increases had been less pronounced in places like the Northern Territory.

Ms Owen attributed this to a well-compensated, transitory workforce across the resources sector and less demand for housing.

How wages affect the property market  

Ms Owen noted low wage growth compared to high property value growth impacted the property sector in a series of ways.

Harder to raise a deposit

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

In the year to October, Ms Owens noted the 20 per cent deposit for a median value Australian home had increased by $25,417 to a total of $137, 268.

“With wages increasing just 2.2 per cent 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 increases.”

Lower purchasing power

“Another important implication of high house prices relative to subdued wages growth is lower purchasing power when it comes to mortgage serviceability over time,” Ms Owens said.

“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.

“Higher wages growth, which tends to coincide with higher levels of inflation, erodes the real value of mortgage debt, making it easier to pay off.”

A key cash rate indicator

Meanwhile, wages growth is also a factor used by the Reserve Bank of Australia to set the cash rate.

Earlier this month the Australian Bureau of Statistics posted a 2.2 per cent annual increase in the Australian wage price index.

This brings the wages index back to almost pre-pandemic levels and just below the decade average growth of 2.4 per cent.

“The Reserve Bank governor (Dr Philip Lowe) suggested in a speech on Tuesday that annual wages growth could be a ‘guidepost’ for the kind of sustainable inflation needed to trigger a cash rate hike,” Ms Owen noted.

“Governor Lowe alluded to an annual wage price increase of 3 per cent or more being required to maintain inflation between its target range of 2 and 3 per cent.”

Higher interest rate not necessarily a bad thing

Ms Owen notes that, while a cash rate increase was unlikely until 2023, it wasn’t necessarily a bad thing for the property market.

“A higher cash rate would likely put downward pressure on housing prices, but at this stage the RBA maintains that this is unlikely for 2022.

“If housing prices were to fall 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.”

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.