Wage growth and property prices - an explainer.
One of the fundamental drivers of property prices is the state of the overall economy.
When times are good, the price of real estate tends to move up, but when the economy is struggling, property tends to suffer.
The reason is that in a strong economy, wages and other incomes rise and in Australia (like most western countries) a sizeable chunk of that money flows through to property.
For decades, the relationship between rising incomes and real estate was fairly consistent, but over the last few years, the gap between property and wage outcomes has widened.
Why are property prices outpacing wages?
A lot of factors are playing into this phenomenon, but three stand out.
Firstly, over the last five years the cost of borrowing in the form of interest rates has cratered, empowering buyers to borrow more and bid up property prices.
Secondly, whenever the economy looks like it’s struggling, governments have stepped into the breach with stimulus, much of it aimed at the housing market – like last year’s HomeBuilder grants.
Thirdly, Australia is ageing which is delivering more buyers who bring greater amounts of equity with their purchases.
Is this widening gap a problem?
So far no, but it is something to keep an eye on.
A few commentators made much of this widening gap, declaring property in Sydney and Melbourne was “significantly overvalued”.
I’m not so sure that’s the case.
If we saw a significant jump in interest rates (think four or five upward movements) that would produce a big drag on real estate.
But it would also smash the wider economy, so this scenario is highly unlikely.
What is likely is affordability playing an increasing role in which properties perform best over the next couple of years.
I expect multi-million dollar trophy homes and bottom of the pile budget properties won’t fare well in the near future.
The best performers are likely to be grouped around and just below Melbourne’s median price.
If you’re investing in the next year or two, make sure you factor affordability into your thinking.
Author; Miriam Sandkuhler
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