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One picture reveals huge problem with $1 million homes

·3-min read
Aerial view of Australian houses at sunset.
Home price increases are outstripping wages. (Source: Getty)

The median Sydney home is now worth $1.07 million, while nationally the average dwelling will cost $686,339 after months of racing prices, and a new chart has highlighted the problems with this growth spurt.

While Australian home values have grown 193.1 per cent over the last 20 years, wages have only increased 81.7 per cent, and it’s a gap that’s proving to be difficult for prospective buyers to overcome, new analysis by CoreLogic has revealed.

The Australian Bureau of Statistics posted a 2.2 per cent annual increase in the wage price index on Friday, indicating wage growth is close to pre-pandemic levels.

However, home prices have grown 22 per cent over the last 13 months, outstripping the wages growth.

(Source: CoreLogic)
(Source: CoreLogic)

“There are several implications of relatively low wages growth relative to house prices. Firstly, when house prices accelerate faster than incomes, it is harder to accumulate a housing deposit for a mortgage,” CoreLogic head of research Eliza Owen said.

She noted that a borrower attempting to gather a 20 per cent deposit on the median dwelling will have needed to save an extra $25,417 compared to October 2020, with the deposit required now $137,268.

“With wages increasing just 2.2 per cent in the year to September, it is difficult for household savings to keep up with this kind of increase. This tends to lead to less demand from first home buyers through periods of rapid property price increases,” Owen said.

“Another important implication of high house prices relative to subdued wages growth is lower purchasing power when it comes to mortgage serviceability over time.”

Historically low interest rates have kept a lid on the portion of income required to service a mortgage, but low wages growth and inflation also means that borrowers have been unable to get ahead on their mortgages as easily.

“This is particularly burdensome for relatively new mortgage holders, taking on long loans of 30 years, especially if mortgage rates rise,” Owen said.

But as wages grow, and so too does inflation, the real value of mortgage debt becomes easier to cover, she added.

The Reserve Bank of Australia recently alluded to a 3 per cent annual wage price index increase as the required figure to sustain inflation between its 2-3 per cent target range. Once inflation is comfortably within this rate, it will then consider increasing the official interest rate.

This is still unlikely for 2022, Owen noted, however once it occurs it could prompt a shift in the economic landscape for first home buyers.

“Recent home buyers may take a hit to their equity levels, but would hopefully also have greater capacity to service their mortgage through wage increases.”

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