What does wage growth data mean for home owners and renters?

The latest wage growth data from Australian Bureau of Statistics released today shows a rise over the year, but wages are still well behind the latest inflation levels. In a time of higher costs of living and rising interest rates, what does this data mean for homeowners and renters?

ABS figures show that in the March quarter 2022, the seasonally adjusted Wage Price Index (WPI) recorded a rise of 0.7% over the quarter, and 2.4% over the year.

This increase to Australian’s take home pay is still behind the latest inflation figures, which recorded a sharp rise of 5.1% over the same annual period. This increase was the highest level recorded since the 1990s, and an influencing factor for the May 2022 Reserve Bank of Australia (RBA) cash rate hike.

As the RBA looks to macroeconomic factors like inflation and wage growth when determining the movement of the cash rate, the latest wage growth figures will play a role in its next decision around monetary policy in June.

Let’s explore what this may mean for current homeowners and renters hoping to get a foot on the property ladder.

What will this mean for homeowners?

The wage growth data released today has previously been earmarked by economists and experts as the data to watch regarding the next RBA cash rate move. But how high could the RBA hike the cash rate in June?

Some economists had suggested that a larger rate hike of 40 basis points could occur if wages saw strong growth, as opposed to the RBA’s standard 25 basis points hike.

And in the minutes of its May 3 board meeting released Tuesday, the RBA revealed it had considered a greater hike of 40 basis points for May.

“An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates,” Mr Lowe said in the minutes.

Big four bank, Westpac, previously predicted that a 40 basis points hike may occur in June as a result of rising inflation levels. At the time, RateCity research crunched the numbers and found a 40 basis points hike could mean a homeowner on a 25-year, $500,000 home loan was paying $129 more a month in mortgage repayments by June.

But where Lowe previously signaled a 3% increase would mean a necessary rate rise, the RBA now says it will look at average hourly earnings instead.

ABS head of prices statistics Michelle Marquardt said: “In March quarter 2022, the average size of private sector hourly wage rises increased to 3.4 per cent, the highest quarter increase since June 2013."

So, what does a 2.4% annual increase in wages and 3.4% increase in private sector hourly wages mean for your home loan interest rates? While it’s hard to definitively predict what the RBA will do next, this may suggest a second interest rate hike for 2022 is still coming – it may just be less severe than suggested.

Wage growth figures released today could indicate a June rate hike of 0.25% as opposed to a higher hike of 0.40%, as previously predicted.

What will this mean for renters?

For anyone not worrying about their home loan interest rate, wage growth trailing behind inflation is still not ideal.

This morning, Shadow Treasurer, Jim Chalmers, told the ABC: “Real wages are going backwards and are expected to go backwards even further today, when the new numbers for wages are released.”

“What really matters is whether people can feed their families in this cost of living crisis when their real wages are going backwards,” he said.

The current cost of living pressures will impact all Australians, regardless of whether they currently own a home. However, with monthly mortgages now cheaper than renting in 274 suburbs, or one in four markets across the capital cities, higher cost of living means that affording rent – let alone saving for a deposit - is now that much harder.

And with the latest Rental Vacancy Rate report from Domain showing national vacancy rates at a record-low of just 1% amid a surge in rental demand, renters are now battling it out in a landlord's market.

The topic of housing affordability has been a hot one in the lead up to the election this Saturday. The latest suggestion from the Coalition for first home buyers has been to nab a property by dipping into their super.

Unfortunately for young Australians who make up a large portion of would-be buyers currently renting, their superannuation funds may not be large enough to make the scheme worthwhile. And the latest wage growth figures from today may indicate that this is not about to change any time soon.

If the RBA were to continue to hike the cash rate and interest rates on home loans continue to rise, this may help to lower house prices. This may make it more affordable for would-be buyers to enter the market.

But renters stuck paying a landlord’s mortgage may struggle to get ahead and save a deposit if wage growth remains well behind inflation, even if the housing market becomes more affordable.

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