Affordability suffers as wages fall further and further behind

Posted on 6/06/2007  

“A greater share of economic growth is going into company profits than wages.”

There are many reasons why housing affordability is so low and why we have a two-speed property market, but meagre growth in the incomes of average households is a big component.

The recent property boom, which doubled (in some cases, tripled) prices in many areas, and eight consecutive interest rate rises (including three last year), which have added greatly to monthly mortgage payments, are also big reasons behind low affordability. But it’s the slow pace of wages growth that has really hit the ability of families to buy homes.

(Contrary to the development lobby’s claims, it has little to do with stamp duty or land supply.)

The Melbourne Institute Wages Report shows that the national pay indicator rose 3.7% in the 12 months to May 2007. This compares with 3.8% in November 2006 and 2.9% in May 2006. The report by the Melbourne Institute of Economic and Social Research publishes a graph charting average annual growth in the “total pay indicator” from 1999 to the present day. It shows that the annual growth in wages has fluctuated between 1.5% and 4.5% over the past 7-8 years, but mostly has been within a tight band of 2% to 4%.

It’s easy to see from those figures why fewer and fewer households can afford to buy property. The price of real of estate has been rising at rates far in excess of the rate of wages growth.

Take Melbourne, as one (moderate) example. Over the ten years to 2006, many suburbs had price growth averaging above 10% a year – and the better-performing ones averaged 12% to 14% a year.

In many capital cities, growth rates have been much higher than that.  Many Brisbane suburbs had median price growth averaging 13% in the ten years to 2006, with the top performer averaging 16.5%. And in Perth,  the leading 15 suburbs on capital growth have all averaged between 16% and 20% a year over the past decade.

When you put that kind of price growth along wages growing typically at perhaps 3% a year, it’s easy to see why home ownership and property investment is slipping fast from the grasp of individuals and families.

The biggest problem is that the benefits of the prolonged economic boom have not filtered down to the mainstream. They have been trapped in the upper echelons. Executive salaries have grown to almost obscene levels, business profits have been consistently high and those with means have profited from a booming sharemarket, but the average punter has had wages growth that has barely kept up with inflation.

The Wages Report indicates that business managers and professionals were the most likely to have improved incomes in the past year, while tradespeople and para-professionals had the lowest income growth. As The Australian newspaper reported recently: “The national gains (in incomes) have been modest over the past five years and the incomes of a significant minority (around 40% of the population) are standing still after inflation … The average household’s income, after tax and government benefits, is 5% higher now than it was five years ago, after making allowance for inflation.”

Property values have doubled in many areas in the same time frame.

The Australian also reported: “The rise in disposable income is less than might be expected, given the average increase in GDP per person of 12% over the past five years.

This is because a greater share of economic growth is going into company profits than wages.”

Stewart Kestel, managing director of Hegney Property Group, says in a recent report that the wealthiest 20% of households account for 59% of total household net worth, with an average net worth of $1.4 million per household, based on ABS data. Meanwhile, the poorest 20% of households accounts for just 1% of total household net wealth, averaging $23,000 per household.

This is why we currently have a two-speed market in many parts of Australia: a buoyant upper end and a stagnant mainstream. While reports flood in of the well-heeled paying top prices in the blue-chip suburbs, bank repossessions of homes in the mortgage belt areas are happening in record numbers.

The Daily Telegraph recently published the results of a poll which found that 57% of respondents considered themselves on the financial borderline, in terms of their ability to withstand further interest rate rises.

This is a consequence of recent rises in property prices and interest rates, versus the much smaller increases in household incomes.


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