Higher wage growth could crash the property market

CoreLogic’s head of research, Eliza Owen, has published interesting research comparing the growth of Australian property prices against wages:

This month, the ABS posted a 2.2% annual increase in the Australian wage price index (WPI)… The 2.2% uplift represents wages growth getting back to pre-pandemic levels, and is just shy of the decade average growth of 2.4%…

Australian wage growth

While wages increased 81.7% in the past 20 years, Australian home values have grown 193.1% (figure 2)…

House prices versus wage growth

The difference in growth across wages and house prices is presented by state in figure 3…

House prices versus wage growth by state

Eliza Owen went on to explain several channels through which wage growth impacts the property market:

  • Wage growth impacts one’s ability to save up a housing deposit;
  • Wage growth impacts mortgage serviceability; and
  • Wage growth impacts inflation and mortgage rates.

It may sound controversial and somewhat counter-intuitive, but higher wage growth could be the harbinger of the next major housing downturn.

The record low wage growth experienced over the prior decade was the primary cause of persistent low inflation and the sharp fall in the RBA cash rate:

RBA cash rate

This low wage growth, in turn, was driven by persistent ‘slack’ in the Australian labour market caused primarily by the strong immigration program, which added 180,000-plus workers to the Australian economy every year.

Thus, if wage growth was to accelerate from here on the back of lower immigration and a tightening labour market, then this would be met with higher interest rates, which would cause property prices to fall.

Indeed, the RBA has stated repeatedly that it needs to see wage growth with a ‘3’ in front of it for inflation to hit its target.

As noted by economist Gerard Minack last month:

Wage growth is now central to RBA policy. The Bank says it will not tighten until actual inflation is sustainably within its 2-3% target range, and that will require materially higher wage growth than current levels…

The key to the RBA is domestic wage growth. The tricky point is that wage growth is likely to be a function of how reopening the international border affects labour supply. The longer supply is crimped, the more likely it is the wage growth may increase to the point where the RBA will need to tighten before 2024. But if migration flows revert to pre-pandemic levels, then it’s likely that wage growth reverts to pre-pandemic levels. If that happens the RBA may be able to go another 11 years without tightening.

Chris Joye noted similar:

The Australian economy has been exceptionally good at growing at a reasonable pace without generating excessive wage costs. This is partly a function of our ability to continuously import human capital through an ambitious skilled migration program…

A wave of students and skilled migrants would alleviate upward pressure on wage costs and inflation, and possibly allow the RBA to defer increases to its target cash rate into 2023. A great deal therefore hinges on labour supply, and the current lack thereof…

If this offshore labour supply returns, the skills shortages that many firms have been complaining about should dissipate.

Both echo RBA Governor Phil Lowe, who recently acknowledged that high immigration pre-COVID was used to hold down wages.

The upshot is that maintaining the Australian property ‘bubble’ hinges on keeping interest rates low, which ergo hinges on suppressing wages through high immigration.

Perverse isn’t it? Crush wage growth via immigration to ensure lower interest rates and higher house prices: win-win for the elites.

Unconventional Economist
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Comments

  1. lolol omfg, we need “skilled” immigration to keep wages low so IRs stay low to keep house prices high so we have to borrow multiples more than we should otherwise if wages go up rates will go up bringing house prices down to a level people can afford and we certainly don’t want that!

      • Strange EconomicsMEMBER

        “If only more people” could come to Australia to help raise house prices.
        Empty Apartment prices will crater if they can’t be filled soon with 6 students.
        Don’t want that before an election, so just keep those prices up for a bit longer…

    • Worthless commoners got it into their heads in the postwar period that they could own a home of their own!!! Thanks to policies implemented by those mongrels Chifley and Menzies, co-conspirators in “building Australia’s middle class”.

      Well, the neoliberals say “No more of this nonsense!” Back to the good old days of landowners/financiers and renters for life.

  2. Can anyone see higher than inflation wage growth occuring? Is profitability really there to justify across the board rises? Maybe in a few select sectors, but not generally.
    I think white collar jobs are likely to be offshored first.
    The latest absurdity of bus drivers going on strike for higher wages, perhaps they think the public hasnt noticed them driving empty buses around for the best part of 2 years.
    How sustainable is it? The public finances will be in tatters if the property bubble comes off the boil even slightly.

  3. C'est de la folieMEMBER

    Higher wage growth could crash the property market

    Yes for sure.

    But we are well and truly past the point where Australia has an economy and a society of people who do ‘things’ and live lives.

    Australia has a real estate bubble to which everything –

    Politics
    The Media
    monetary policy,
    fiscal policy,
    banking regulation,
    planning laws,
    criminal regulation,
    superannuation,
    money laundering policy,
    education policies,
    immigration,
    public transport policy
    infrastructure provision
    Federal-State government relations
    State-Local government relations

    – is subservient. And any changes in any of those could crash the property market.

    I would like to run for parliament on a platform of I would do ‘whatever it takes’ to crash the real estate market – because where we are going with house prices is no good for anyone.

    If crashing the real estate market enables a clear and data backed approach to addressing all of the above then it would be a good thing.

    The only concern I would have about crashing the housing market would be the protection of those who have recently entered or have borrowed right at the limit of their capacity. The staggering waste of at least $50 Billion on JobKeeper provides ample scope to support people in that position, and many others.

    But a crash is what we need. For ourselves and our children, and for our self respect as a nation and society.

    And the great question of contemporary Australia is not whether we have one or not – I think it is everyones policy to avoid one – but which section of society will be bent over and reamed to ensure the great real estate bubble continues unpopped, and how successful that ‘housing bubble pop avoidance’ strategy can be in eternally avoiding that pop.

    • boomengineeringMEMBER

      At first glance my engineering mathematical mind thought so what if wages goes up then they can afford the mortgage. BUT then the math kicked in. If wage goes up 5% on $2,000 week wage = $100. then if interest rates go up the same 5% that is on PRINCIPLE not repayments meaning 5% of 2M = $100,000/yr = $1,923 per wk. or just under 2K/wk increase.
      Summary 5% increase on wages and mortgage = wage $100 extra per week , mortgage -$2,000 extra per week.

      • pfh007.comMEMBER

        Boom,

        Try this maths.

        Borders are re-opened to loads of unskilled labour.

        Wages do not rise.

        Interest rates stay low.

        But the price of land continues to rise by allowing the existing zoned land to be sub-divided into smaller apartments and houses and sold to the new immigrants.

        Instead of paying $500,000 for an off the plan 100 sqm apartment we find people paying $500,000 for smaller and smaller apartments.

        Slow and steady slumification is the model

        • boomengineeringMEMBER

          Totally agree. I’m all for reducing our population and having machines/technology to do the menial work.
          When the Northern Europeans go the USA they are aghast at the amount of manual labor spent on things mechanized back home.

      • ErmingtonPlumbingMEMBER

        Hey Boom are you still looking to buy on the central coast?
        My mate has put his Shelly beach house on the market.
        Closet house to north Shelly beach car park.
        It’s a Good and reliable surf break with plenty of sharks.
        You’d love it!
        The mate is looking to buy mortgage free acres within 30km of Scotts head.

        • boomengineeringMEMBER

          Thanks Ermo but been looking near South of Hixtar’s area. The Central Coast has become too busy and anything near the beach the rates are horrendous. Wasn’t looking at Blue Bay but noticed their rates $2.5K to $17K.
          The factory at Berkeley Vale has been giving me grief as per strata and their fees so looking to get out hence the requirement for acreage for giant shed.
          Friend Paul.e lives in Swadling St near there.

    • Careful there old coq, on Friday I got called a “socialist” for a far less left leaning rant.
      Although I must admit I disserved some form of retribution, after daring to type the two filthiest words in the modern English language “Industrial Policy”.
      I get the feeling you’re not there yet but you’re definitely on the same track, so just a word of warning, it’s a bumpy old ride and there’s no turning back once you start down this track.

        • See what I mean, there’s no turning back once you start down this road.
          All of our social problem suddenly find solutions through informed Industrial Policy
          It’s a narrow treacherous path but it does lead the willing to discover any number of solutions uniquely suited to the Australian problem. No wonder these words are banned in polite company.

  4. pfh007.comMEMBER

    How about we stop using that bit of propaganda spin “skilled” when talking about labour sourced from temporary immigration

    There is very very little “skilled” labour entering the country.

    At best they are recent graduates of one of our degree mills but in almost all cases have almost zero experience working in their ‘area’ of study offshore.

    Which is why we have so many amazingly qualified Uber drivers, hospitality workers and other entry level low skilled workers.

    In any event in most cases Australian businesses are not seeking “skilled” labour.

    They are seeking cheap untrained staff who they can train and if they happen to have some teritary qualification that may or may not be a bonus.

    Considering how many of our incoming workers with work permits have poor quality qualifications (i.e. a Masters by course work from an Australian University) or almost no experience (school leavers /graduates from offshore who have little experience working anywhere) using the Big Australia spin word “skilled” is just playing their propaganda game.

  5. Display NameMEMBER

    So endless high migration and stagnant wages can only push up house prices if serviceability constantly improves, if interest rates continue to go down,.This is probably a self imploding bubble whichever way it goes.

    • pfh007.comMEMBER

      It will not necessarily implode.

      Re-opening the borders to unlimited unskilled labour will allow the ongoing slumification of Australian living standards but that process will not be an implosion. It will simply be a slow and steady ongoing destruction of the living standards of the bottom 60%-70% of the population.

      The value of Australia residential land can be maintained by allowing people to buy ever smaller slices of it or the airspace above it and if the value of the land is maintained the debt secured by it is also secure.

      So be warned.

      Anyone arguing for or demanding that developers be allowed to deliver smaller skyboxes and for borrowers to be allowed longer mortgages (or intergenerational mortgages) and weaker credit laws is supporting the slumification strategy.

      With very few exceptions most “skilled” immigrant labour has very little useful experience and their qualifications are often of limited relevance as well.

      • boomengineeringMEMBER

        Not necessarily smaller lots if The Indians round the corner are any example . Couldn’t work out how a bus driver ( nice guy) could afford the big double story. Until the hordes were seen piling in.

        • NoodlesRomanovMEMBER

          A neighbor of ours is the same. 8 working adults across 3 generations- all relatively modest jobs, but added up they can live in a 3 story house in Brisbane inner north.

          That is fine, but apparently parking your car on your own ducking property is apparently taboo in their culture.

      • Display NameMEMBER

        I am not going to say that we won’t see as you suggest, however the zeitgeist may have turned. We have Alan Kohler, Saul Eslake, the Kouk and even shill Jericho talking about our Ponzi economy and how excessive migration keeps wages down.This would have been heresy even two years ago. This, Covid and Climate change will hopefully put an end to the Ponzi.

          • pfh007.comMEMBER

            Yes – they are just keen to get the ALP in but once in it will be open borders au go go.

            The chattering middle classes run the ALP and they love demonstrating how diverse, cosmopolitan and global they are.

      • Totes BeWokeMEMBER

        “It will simply be a slow and steady ongoing destruction of the living standards of the bottom 60%-70% of the population.”

        That seems exceedingly conservative to what I’m seeing. I would suggest it’s only the very elite suburbs and livelihoods (top few percent I’d guess) that won’t be severely affected.

        • pfh007.comMEMBER

          The top 5 % are not able to do anything without the top 5-30% supporting them and as that 5-30% dominate management and media that ensures they are able to seduce enough of the bottom 70% to get them over the line.

          Basically most of residents 0-10 km from the GPO are on board with the Big Australia program regardless of which part they vote for.

          Neoliberalism aka “Me First” has plenty of support across the upper middle classes even if some of them recycle their bottles and drive Teslas.

          • 100% 👆. Also expect the people within 0-10 kms of the GPO to push for being back in the office to underpin their house prices. The pre 2020 world is coming back faster than predicted.

          • Totes BeWokeMEMBER

            I agree, which is why I say the only way to fix this is destruction of the Labor party everywhere outside that 10km ring. Only then will there be opposition to immigration from the areas it hurts the most.

          • Strange EconomicsMEMBER

            You pretty much picked the strategy.
            The top 5% win (ie pollies and their social group) , give the 5-30 enough benefit. Con the rest.
            People Gotta stay in the upper middle class, but lots will slip down to poverty (like the USA now, where half the middle class dropped off)

      • That’s what I reckon. House price can be held aloft on the shoulders of dramatically falling living standards and slumification.

        At first it will happen slowly. And then it will happen quickly. We’ve had the “slowly” for 10 years. The “quickly” will be arriving soon.

      • Good point pfh007. Anyone arguing for higher density housing doesn’t realise the dynamic here. It only makes housing cheaper if more people don’t come and fill up the excess supply. Higher housing density ENABLES more people to come IMO than otherwise. If a city gets full with lower density or higher density it is still full; the only difference is that the higher density one will be more concrete, hotter, and each person gets “less”. Especially in places like Sydney where it is landlocked.

        Otherwise its just a way to enable the “slumification” as you call it. If high density wasn’t allowed people would feel the pain of migration sooner (less houses for existing and new entrants) and the end game would happen sooner. Without more destruction to the environment, and where people still have a block of land, greenery, a garden, etc.

        Elities want us to be like some other cities – overcrowded, busy, stressful, the best they can hope for is an apartment, and a polluted environment all around them. Where only money gives you a good lifestyle, instead of nature’s generosity (parks, rivers, fresh air, space).

    • FUDINTHENUDMEMBER

      Yah if you accept that the driving force behind higher asset prices has largely been lowering interest rates.. then it’s hard to argue the bubbles won’t implode if they rise..

      Unless of course you reckon centeal banks can get rates down another 7 percent in 10 years..

  6. pfh007.comMEMBER

    “…The upshot is that maintaining the Australian property ‘bubble’ hinges on keeping interest rates low, which ergo hinges on suppressing wages through high immigration….”

    That has always been the situation which is why anyone who has been calling on the RBA to manipulate interest rates lower and lower with ZIRP, QE and TFF were demanding that we make the situation worse.

    Not only was that continuing the demented economic model of driving the economy on cheap debt peddler product lines sprayed at residential asset price but it was making it worse as it was driving the economy into a more highly leveraged / ZIRP dependent debt trap.

    The really odd bit is that when the pandemic cracked the model and blocked the supply of new labour market (low inflation driving) entrants it has taken this long for the implications for our dysfunctional household debt / asset price ponzi scheme to be noticed.

    No suprises that the standard response is that we must smash the borders and flood our labour markets with “unskilled” labour to save our household debt bubble from imploding.

    If you don’t want that to happen (the borders re-opened to unskilled labour that it is…..and it will as sure as night follows day)….we need to start talking about how to unwind the household debt bubble model of economic management.

    No more excuses for ignoring the elephant in the room.

    It is time to end the monopoly of the RBA by the private banks.

    • Jumping jack flash

      We have nothing to worry about except if the rest of the world re-inflates and recovers quicker than us and raises interest rates before we are ready.

      The “weasel words” are “sustained inflation” which basically means the RBA is happy to look through wage inflation of 3% until most people can afford an interest rate rise.

      However, if the rest of the world – who implemented their hyperinflationary COVID stimulus correctly – recover quicker than we do and decide they’re at a point where they can raise interest rates safely, then we will have little choice but to raise our rates in step with theirs’.

      And if our price inflation hasn’t matured to the point where wages are finally inflating when that decision is made, then we’re going to be in a very bad position.

      • This is really the only risk, but even I see that as unlikely. I think they will personally welcome a lower AUD; it makes us more competitive. They may “see through that” as well especially with enough lobbying and perks after politics.

        Australia has really gone downhill.

        In the end this party can keep going as long as governments, and their private backers want it too. Which is a very long time. After all the fuel for it (money) can be conjured up from a computer spreadsheet. The inflation genie has come out of the bottle – in a debt based economy it just looks different. Assets rise in proportion to consumer goods – inflation affects supply inelastic things (land, Bitcoin, etc) more than it affects competitive elastic things (food, workers under high migration, etc).

    • ‘That has always been the situation which is why anyone who has been calling on the RBA to manipulate interest rates lower and lower with ZIRP, QE and TFF were demanding that we make the situation worse.’
      That was a small sacrifice made for the benefit of all.

    • Labor, Greens, LNP. They are all the same. They are the elite for the elite. Only real difference is the who and what visa in regards to immigration.

      Let’s not forget that Labor wanted unlimited grannies and also said they would increase immigration should their NG reforms tank house prices. LNP or Labor, the working class are just screwed over either way.

      • Totes BeWokeMEMBER

        Yep. Gillard introduced the $5m visa. AND Rudd opened housing to foreigners, AND both increased immigration. Labor are beyond a disgrace.

        “would increase immigration should their NG reforms tank house prices”….

        No fkway…..DID THEY?

        So, it never was about affordability, but class warfare.

        Got a link? Has MB discussed this?

    • Think of how corrupt and morally bereft the Libs are and yet the polls show both teams are evenish. I see the LNP as believing they can literally do anything …. no matter how bad …. and they will still win. This is what happens when you have no opposition.

      Thanks Labor and the poxy Greens. Waves at Mrs … yes .. Mrs Smithy.

  7. When the ABC did that silly puff piece on whether or not high immigration lowers wages, they should have interviewed Eliza Owen, instead of those idiot business lobby shills.

    • I cannot even turn on the ABC anymore. Made that mistake this morning even though I announced to the fam “why am I doing this?”.

      Instantly greeted by selective report and misinfo on the Rittenhouse thing followed by some pretty idiot telling me there is a massive skilled labour shortage in hospitility and…er…(you could see she realised her mistake) mining and engineering and…..farms…..

      ROFLMAO. Get lost ABC.

  8. Jumping jack flash

    I think its nice that after almost 20 years of suppressing inflation and with it, wages, now they’ve finally run out of interest rates to cut to make their perverse flavour of capitalism function, they’re now turning their attention to bringing back inflation, and with it wages.

    This should have been done a decade ago. Thank goodness for COVID

    All because they turned the economy inside out so bankers could be put in charge of it, because ignorant politicians couldn’t be bothered learning how it works. Gone are the days where our politicians – those so-called “great leaders” of the modern era, are experts at anything they’re put in charge of. Truly the Peter Principle is alive and well in global politics.

  9. I would like to run for parliament on a platform of I would do ‘whatever it takes’ to crash the real estate market – because where we are going with house prices is no good for anyone.

    Me too.

    When the house prices crash there will also be problems in the banking system and this could disrupt important things like the food supply.

    It is important that we are clear that expensive housing is bad, the banking system that needs expensive housing is bad, but the food supply is good. The citizens must concentrate on getting rid of the bad, while keeping the good.

    It might sound scary communist to some people, but I believe we need to create some redundancy in our systems so that not everything is dependent on our banking system and current money and current “markets”. For example what if basic food was delivered free to you by a truck driver with fuel supplied by the army? Should the banking system collapse and trucking firms and fuel supply collapse as well, then at least your basic food still gets to you while the mess is sorted out.

    Perhaps a system where govt-issued merit tokens are circulated alongside current money could be part of it. Imagine if in order buy certain things in certain places you needed merit tokens as well as money. These tokens could only be earned through specified voluntary (low paid) work, like driving the truck with the free basic food.

    The merit tokens would form an alternative system, force elites to do some real work, and provide a useful backup should the current banking and monetary system fail.

    • Jumping jack flash

      Its not the prices of the houses its the use of debt to pay them.

      If our economy was performing so well and we made so much awesome stuff that we sold to the rest of the world who eagerly bought it for a profit which was then used to pay high wages, then relatively high house prices would be no problem whatsoever.

      The problem is we are buying and then spending fake debt money that hasn’t been earned, it is literally magicked into existence, and it doesn’t relflect the abject failure that is our economy – which is primarily geared towards everyone paying everyone else with debt to perform services, and everyone using debt to buy imported items from local retailers at a premium.

      High house prices in that kind of economy can only be supported and sustained with massive and constantly growing piles of debt. And so they are.

    • Perhaps a system where govt-issued merit tokens
      And so it starts.
      What’s wrong with our current system of “merit tokens” aka “Aussie dollars” ?
      What’s wrong is that issuance is not limited to governments for rewarding worthwhile labour, but is rather is free to all our banking élite and Government pork barreling.
      And before we know it these “tokens” are as worthless as the labour we deployed to earn them while Assets values continue their skyward climb.
      Maybe it’s not Government issued token that were really after but rather community issued tokens.
      Think about it. What happens if baker’s bread tokens are exchanged for the farmers grain tokens and in turn exchanged for mechanic skills tokens? What happens is that the banks are left with their bundle of self minted worthless tokens (Aussie dollars) while the farmers, the bakers and the mechanics demand the exchange of real assets for supporting the unproductive economy through their issuance of community tokens.
      I can’t help but think that our present concept of big government is not part of the solution because our Governments are already the biggest parasites on the planet. This is not a government of the people, for the people, what we have instead is an élite governing workers for the exclusive benefit of the élite

  10. Turbocharged mass immigration is just the perfect policy for the elites: investable asset inflation and real wage deflation. Basically anyone relying on wages will not earn enough to purchase investable assets and hence will not become part of the elites.

    • Jumping jack flash

      This!

      And then consider the flow of debt, which becomes essential for the lowly wage slaves to use to buy what they need because wages alone eventually fail to provide and must be supplemented with debt.

      The debt is dutifully handed to those who own and provide the investible assets!

      • I think that’s our future. Many people are realising it as well – as more people realise it the effect will get faster as people do what they can to protect themselves (buy more of the leftover assets despite their relative “high pricing” to wages).

        Its been my investment thesis for a few years now actually. With Pfh comment about “slumification” this will also occur. Invest accordingly. Pessimism about our future has paid dividends since the end of the 90’s.

      • working class hamMEMBER

        Once the Gold standard was abolished, the path already decided, just the speed varying in different regions.
        The last asset inflation spike, included a rush on everywhere, not just major capitals, opening the eyes of a many normal Aussies to the land sale which will lock out a generation.

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