Incomes growth determines capital city house prices growth: Andrew Wilson

There is no underlying systematic model of Australian house prices. Each housing cycle is different in its depth, breadth, duration and composition.

Australian capital housing markets performances however reflect an overall consistent trend but differ in intensity according to local supply and demand factors.

The underlying consistency of capital city housing cycles reflects the overarching influence of national monetary and fiscal policy settings – interest rate settings and government spending.

The nature of capital city housing cycles essentially reflects the nature of the local, national and international business cycle.

Australian house price growth typically follows the growth in incomes over the medium to longer-term.

Analysis consistently reveals that the proportion of average disposable income required to finance the average home loan has remained relatively stable for decades. And this can be no surprise given the rigidity and risk aversion of Australia’s mortgage lending environment.

Incomes growth is directly determined by the local demand for labour which is determined by the performance of local economies.

High demand for labour encourages wage rises that facilitate an increased capacity for home purchases. High demand for labour also encourages immigration that increases demand for housing.

It is no coincidence that the capital cities with the lower relative unemployment rates have higher incomes and higher house price growth.

The capacity of local economies to generate jobs is therefore a key element in the outlook for house prices growth.

The medium-term outlook for the Australian economy remains mixed with the resources states of Western Australia and Queensland to be continued beneficiaries of high international demand for minerals and primary products with economic growth to be exacerbated by a lower currency.

Other states are set to remain subdued overall particularly with the continued decline of the manufacturing base in Victoria and to a lesser degree New South Wales. Living standards can be expected to moderate through long-term economic adjustment which will impact on employment levels and incomes growth

Medium term demand for labour in Perth and Brisbane can be expected to increase and remain relatively strong with incomes growth to average 4 percent annually. This will equate to average house price growth of 6 percent per annum.

Prices growth in Sydney will average 5 percent per annum underpinned by housing shortages and despite lower levels of incomes growth. Similarly lower incomes growth through underperforming local economies will impact on the other major capitals with Melbourne to average 4 percent and Adelaide 3 percent annual house price growth.