How Wage Growth Data Impacts Renters and Homeowners
Last updated on August 12th, 2022
According to the Australian Bureau of Statistics, wage growth only increased by 0.7% in March 2022, contributing to 2.4% over the previous year. This increase, however, still falls short of the latest inflation levels, which recorded a sharp ascent of 5.1% within the same period – an all-time high since 1990.
What do these all mean for renters and homeowners already struggling with rising interest rates and the high cost of living? Financial institutions such as the Reserve Bank of Australia (RBA) look at macroeconomic metrics such as wage growth and inflation when determining the movement of the cash rate. Therefore, this latest development could play a crucial role in its next monetary policy in the next quarter.
What this means for homeowners
The next RBA cash rate movement will depend on the recent wage growth data. Some economists suggest that a strong wage growth could lead to a rate hike of 40 basis points instead of the standard 25 basis points hike by RBA.
RBA is even considering a number higher than 40 given the risks to inflation and low interest rates.
Westpac also predicted a 40 basis points hike which could mean a $129 increase in mortgage payments for a homeowner with a 25-year, $500,000 home loan.
Although RBA previously said a 3% increase would trigger a necessary rate rise, it is now looking at average hourly earnings instead.
Note that in March 2022, the average hourly wage in the private sector increased to 3.4%, the highest for a quarter since June 2013.
So, what does a 2.4% annual wage increase and 3.4% hourly wage increase mean for your mortgage interest rates?
This could signal a second interest rate hike for 2022, although it may be less severe than earlier predicted.
Homeowners could expect a rate hike of 0.25% in June rather than the 0.40% as previously projected.
What this means for renters
Though renters do not need to worry about home loan interest rate, the fact that the wage growth is trailing behind inflation still has an economic impact on tenants.
Real wages are further going backwards, and Australian families are feeling the crunch with wages not being able to keep up with the higher cost of living.
Inflation prices will impact all Australians whether or not they are paying for a home loan.
The latest numbers may have a more negative blow on renters than homeowners. Mortgages are now cheaper than renting in one in four markets across capital cities – which means paying rent is much more difficult.
According to the latest Rental Vacancy Rate report, national vacancy rates are only 1% – a record low – despite the surge in rental demand. As a result, renters now find themselves battling it out in a landlord's market.
Housing prices have been a hot topic as first-home buyers are now forced to dip into their super just to be able to afford buying property.
Young Australians make up a large portion of first home buyers. Unfortunately, their superannuation funds may not be big enough to make the scheme worthwhile.
The wage growth figures for March 2022 may indicate that the situation is not about to change any time soon.
If the RBA were to continue to hike the cash rate while mortgage interest rates continue to rise, this could help bring down property prices and make it more affordable for first home buyers to enter the market.
However, renters stuck paying the landlord’s mortgage could find it challenging to save a deposit for a new home if wage growth remains well behind inflation – even if real estate becomes more affordable.
Check out our comparison pages for the latest interest rates on home loans.
