“Wages growth has picked up, but it’s certainly not — as measured by the Wage Price Index — particularly strong, although it is directionally moving up and that’s a good thing, and that’s what you’d expect given how tight the labour market is.”
Australia’s unemployment rate was at a 48-year low of 3.9 per cent in April, ABS figures released on Thursday show.
Aird expects it to take time for wages to rise further as many employees are covered by multi-year agreements. The participation rate is also at record highs, he added, compared to in the US where some workers got sick with COVID and dropped out of the workforce, so the smaller pool of workers helped employees push for higher pay.
He expects that later this year and next, property values more broadly will be falling and wages growth improving.
“It sounds counterintuitive to think that as people’s wages go up, the amount of money they’re willing to pay for a home is less,” he said.
“The interest rate is going up — that’s going to weigh on how much someone can borrow — and their mortgage repayments are going to be higher for a given level of debt.”
This could reduce the amount someone needs to save for a home deposit at the same time as they get paid a little bank interest on their savings and enjoy a pay rise, he said. But whether housing affordability improves will depend on how far housing prices fall compared to their increasing monthly repayments.
NAB senior economist Gareth Spence said low interest rates meant households could borrow more and service a larger debt, pushing up property prices, but this could soon flip.
“We have [forecast] housing prices slowing this year as interest rates and expectations strengthen, and then declining by 10 per cent next year,” he said.
“But after that, we think they normalise to around wage growth … we have wages growth getting to about 3.5 per cent eventually.”
He said price falls improve housing affordability in one sense, but this was offset by higher interest rates on mortgage repayments, which meant it was not much easier to buy a home.
“What you’re losing on the price you’re gaining on servicing the mortgage anyway, so in net terms are you that much different? Not too much,” he said.
“The affordability question is a very difficult one but over time supply and demand is what matters, so if you want lower house prices or slower growth over time you have to build more houses.”
Westpac senior economist Matthew Hassan said low interest rates over time had reduced mortgage repayments and pushed up property prices, but this was now starting to reverse as interest rates rise and prices were likely to fall.
Wage rises tended to be more gradual over time, he said, and the economy was heading into a period of a very tight labour market while property prices dipped.
“That will see some eventual improvement in affordability, although it will take time to come through and it will be in a higher interest rate environment, so it’s still not easy to get into the market,” he said.
“We will be seeing a shift towards a mix that will see some improvement in affordability but it’s coming from a very stretched starting point.”