While high mortgage interest rates result in large mortgage payments relative to income, this only occurs in the early years of the mortgage as high wage growth inflates away the burden. In contrast, borrowers facing high housing prices with low interest rates and poor wage growth face a greater burden across the life of the mortgage due to greater payments to income.
This housing affordability analysis is applied to long-term annual data between 1880 and 2016, anchored to the median house price at an LVR of 80% at the start of each decade thereon. While data on mortgage interest rates and wage growth for the years after 2016 cannot be known, they are assumed to hold still at the present rates: 5.4% for the mortgage interest rate and 1.4% for wages.
The following chart illustrates the outcome of applying this method, demonstrating the proportion of aggregate mortgage payments to household income over the 25 years of the mortgage. The results are overpowering…
2010 stands out above all else. Extreme housing prices combined with the lowest nominal wage growth post-WW2 means mega mortgage mugs will not have their loan payments inflated away, despite lower interest rates than in the decades between 1980 and 2000. The stats for 2017 will be shocking…
Trends are ominous for recent and aspiring buyers. Nominal wage growth will continue to decline as economic growth limps along, no productivity-enhancing policies have been enacted in recent times, underemployment continues to rise, the terms of trade will weaken over the long-term and excessive immigration floods an already weak labour market…
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
