Last Updated May 23, 2011 9:23 AM EDT
In the last seven years, what the ABS call "ordinary time earnings" have increased 40 percent, considerably more than the cost of living: the consumer price index (CPI) rose 22 percent over the same period. We expect wages to increase a little more than CPI as a result of improvements in productivity --- each year we get slightly better at producing stuff and you'd hope that is reflected in wages, but this differential is greater than that. So what are we doing with the extra money? Well, most of us will be using it to pay for a home loan; house prices have risen 45 percent over the same seven years --- twice the rate of inflation.
It's not surprising, therefore, that the RBA is keen to keep interest rates high. Higher house prices are clearly driving demand for higher wages, which will be passed on to production costs and will drive up inflation. Or maybe the reverse it true. Higher salaries are enabling us to borrow more --- a depressing scenario in which we are spending the spoils of the resources boom pushing up the price of houses that we could have bought for less if the boom hadn't existed.
The problem for home owners is that house prices have been growing faster than salaries. The more we can earn the more the bank will let us borrow, based on whatever they deem an acceptable ratio. So as salaries rise, house prices rise faster. Most probably the wage growth is predominantly in the mining sector (the only industry where salaries have kept pace with house price growth), making property increasingly unaffordable for the rest of us.
- Banks lend more, which they have been doing, but they now seem to be more careful about how far they'll stretch loans as a multiple of household income
- People earn more, which means working longer hours or pushing for higher wages. As we reach full employment this might be possible, but this is hardly the economic climate for companies to be pushing up their production costs
- House prices stop growing faster than salaries
The last four graphs shows that there is a huge regional variation --- Sydney house prices and salaries have roughly kept pace with inflation, while in most other capitals, particularly in Perth, house prices and salaries have grown much faster than the CPI. In Perth it seems they've used their extra wealth to double house prices over the last seven years (compared to 21 percent growth in Sydney). When house prices outstrip wage growth to such an extent you'd have to assume a massive correction is overdue.
These graphs seem to contradict those who argue that house prices are driven largely by availability. Proponents of that arguyment say if we released more land for residential use prices would level off. Well, in Sydney, with a growing population and no significant land releases, prices have levelled off, whereas in most other capitals house prices have grown significantly. Why? Because house prices are more do with salary levels and the availability of bank funding. So when wages increase people borrow more and spend it on housing. It makes you wonder whether the mineral boom is worth it, if all we're doing is spending it on housing. Who wins with that? Oh yes, the banks of course.
- ABS Average Weeky Earnings, Australia, Feb 2011
- ABS Consumer Price Index, Australia, Mar 2011
- ABS House Price Indexes: Eight Capital Cities, Mar 2011