Australia House Prices Hugely Outpace Wage Gains, CoreLogic Says
(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, CoreLogic Inc. says.
“That is because movements in wages and inflation will influence the cash rate, a key determinant of mortgage rates,” Eliza Owen, head of research at the property market consultancy, said in a report Friday.
On one hand, higher wages and faster inflation help erode the value of existing debt, Owen said, while on the other, higher interest rates increase repayments, stretching the finances of Australian home-owners with sizable loans.
Reserve Bank Governor Philip Lowe said this week he would use wages growth as one of the “guideposts” in assessing whether inflation is “sustainably” within the central bank’s 2-3% target range. The RBA sees pay gains accelerating to 3% in about two years, from 2.2% 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% in the past two decades -- at a time of subdued wages growth -- 82% over the same period -- is difficulty accumulating a deposit to purchase, Owen said. A 20% deposit on the median Australian home rose by A$25,417 ($18,497) to A$137,268 in just the year to October, she noted.
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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