Wage strength is vital to housing market outlook, expert says
Australian property prices have risen much faster than wage gains over the last 20 years, pushing up household debt, according to CoreLogic.
Eliza Owen, head of research at CoreLogic, said the future strength of wages is vital to the housing market’s outlook, according to a Bloomberg report.
“That is because movements in wages and inflation will influence the cash rate, a key determinant of mortgage rates,” Owen said in a CoreLogic report released Friday.
Owen said that higher wages and faster inflation helped erode the value of existing debt, Bloomberg reported. On the other hand, higher interest rates increase repayment amounts, putting a strain on the finances of borrowers with large loans.
Reserve Bank Governor Philip Lowe said last week that he would use wages growth as a guidepost to assess whether inflation has sustainably reached the RBA’s target band of 2% to 3%. The central bank predicted that wage rises would hit 3% in about two years, from 2.2% currently, Bloomberg reported. That would open up the possibility of a cash rate hike in late 2023.
Australia’s debt-to-income ratio is among the highest in the developed world, Bloomberg reported – a situation that makes homeowners vulnerable to rapid or extreme rate hikes.
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House prices have risen 193% in the past two decades, while wages growth over the same period has been just 82%, according to Bloomberg. One implication of that disparity is the difficulty for prospective homeowners to save a deposit, Owen said. A 20% deposit on the median home rose by more than $25,000 in just the year to October, according to CoreLogic.
Owen said that if the RBA begins tightening policy in earnest, it would exert downward pressure on housing prices. That could make it easier for first-home buyers to enter the market. At the same time, recent homebuyers “would hopefully also have greater capacity to service their mortgage through wage increases,” Owen said.
