(Housing) inflation? House prices set to rise 10x faster than wage growth
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House price growth could outstrip wages growth more than tenfold by the end of 2021, new data claims.
By the year’s end low and medium-income earners will likely be worse off, as the gap between average household income and house price growth — which has been expanding for years — continues to widen and exclude first time buyers from the property market.
The average cost of housing in Australia was about 2.5 times the average household disposable income in 1990, according to the Reserve Bank of Australia (RBA).
Housing across Australia is now priced at five times that, the RBA found, with capital cities like Sydney and Melbourne costing even more.
A recent Demographia list ranked Sydney the the third least affordable housing market, trailing only Hong Kong and Vancouver.
While Australia’s job market has seen an impressive recovery since the depths of the recession, with the unemployment rate falling to 5.5% in April, it will have little impact on the purchasing power of most prospective buyers.
The improving job market won’t make a difference either for modest income earners trying to save a house deposit, Shane Oliver, chief economist of AMP Capital, told Domain.
While wages rose by 0.6% in the March quarter, tracking at an annual growth rate of 1.5%, newly released data from CoreLogic shows that house prices shot up at more than eight times that pace during the same period.
Within the context of the current market, Oliver said, any boost to wages “hardly makes any difference.”
“House prices are up 8% already this year based on CoreLogic numbers,” Oliver said, with “another 2% coming in May alone.”
“As this year settles down, we’re going to see house price growth at 15 or 20% in some cities.”
Oliver also said that while those in the hospitality, food services and accommodation sectors may have seen wage bumps, when “you’re still on the minimum wage on which most people can’t get in[to the market] it doesn’t really help,” Oliver said.
“Affordability is getting worse.”
The odds are stacked against lawmakers’ attempts to improve the cost of housing, economists said, with the millions of home-owning households – who do not wish to see the value of their asset fall – dwarfing the roughly 100,000 first-home buyers every year.
New data from CoreLogic estimates that the overall value of residential housing across Australia reached $8.1 trillion at the end of April this year.
Tim Lawless, research director at CoreLogic told Domain that with 53% of household wealth now held in property, “it’s understandable that policymakers would be reluctant to implement policies that could place housing values under downward pressure.”
“A reversal in home values could see households spending less as the wealth effect moved into reverse, weighing on economic growth,” Lawless said.
Saul Eslake, an independent economist, told Domain that the odds are currently stacked against politicians who want to make housing more affordable, as two in three Australians are already living in a home they own or are paying off.
“There are a lot more votes to be had from the 11 million or so people who already own at least one property…than there are from the people who in any given year have a realistic chance of becoming property owners for the first time,” Eslake said.
“The reality is that there is little political support for such a change, with two out of three Australians living in a home they own or are paying off, Dr Oliver said.
Economists say that while stripping back demand-driven policies would be difficult, it’s an effective way to subdue house price growth.
Ellen Witte, partner at SGS Economics, told Domain that unwinding such policies would provide financial incentives for the private sector, including super funds and large scale investors, to build more affordable homes efficiently.
“At the moment, it’s driven by investors and speculation, and that balance needs to shift. There is an ongoing incentive for house prices to keep growing,” Witte said.