Wages and House Price War
The baby boomers had a volatile time. Inflation was high and volatile as were mortgage rates (and divorce rates). But the one thing they had on their side was that wages kept up with house prices. From the early 1970's to the late 1980's Australian median house prices hovered around 4.5 times annual average wage earnings. Roughly this means that you could repay capital over 25 years with 18% of average wage and mortgage interest at say 10%pa would initially consume a further 45% of wages (a total of 65%). Or if you had saved a deposit of 25% (as most baby boomers had to for a loan to be granted), these figures would reduce to 14% capital repayment and 24% initial interest (total 38%)
Fast forward to Generation X's position now. The house price multiple is around 8.5 nationally. Credit has been so freely available nobody worries about saving a deposit, and capital repayment becomes 34% and initial interest 85% for a total of 129% of earnings compared to the baby boomers 38%. Even if we allow for Gen X to be two income earners, it's still 65% of both earnings. If you look at the option of renting rather than buying it's tough now. At a 5% gross rental yield, current house prices imply rent of 43% of wages versus 23% for the baby boomers.
So how is the war between wages and house prices being fought. On wages the first battle line is in pubic sector. Public sector wage increases have fallen behind private sector in the last few years and we have seen teachers and nurses strikes in Victoria. The Reserve Bank thinks they can hold off the private sector wage push with interest rate rises. House prices could cave in but the house is such a precious family asset in Australia and with continuing demand through immigration, this seems unlikely other than in an economic depression scenario. The most likely end result looks like being a slow grinding down of Generation X and Y to a lower standard of living compared to the surreal experience they have had in their 20's and early 30's and continued lower fertility rates.
Posted Sunday, 2 March 2008
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