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The Link Between Incomes and Property Prices - October 2020

By Guest Blogger, Peter Koulizos, property lecturer and author


There are many factors that influence property prices. Some of these relate to demographics, some relate to the building and some are connected to its location. Money, especially incomes and the availability of credit, also play are large role in determining property prices and its rate of growth. However, the correlation between these factors and property prices is not always straight forward.

In some cases, property prices can grow when incomes are falling. You might ask “How can this be?” I’m glad you asked!

You might expect that if incomes grow by say 5% in a year, then property prices should also go up by 5%. If incomes was the only factor that affected property prices, they would be perfectly correlated but as I mentioned at the beginning of this article, there are other factors at play.

For example, if transport infrastructure is improved to the area and creates extra buyer demand, it can significantly contribute to property price increases. If the area is rezoned from residential to industrial, it can decrease property prices.

Another scenario is “old money” and the role this plays in property prices. I’ll try and illustrate my point with a simple example. Let’s imagine that in 2020 there is a suburb called Toorakville. It is situated in a leafy eastern suburb of one of our capital cities. The average annual income per household is $200,000, median age is 59 and it has a median house price of $3 million dollars. Now let’s fast track 10 years. The average annual income in 2030 is $100,000, median age is 69 and median house price is $6 million. How can it be that the average income has halved but property prices have doubled?!

In 2020, all the 59 year olds were working and earning good money so as to pay off their mortgages. In 2030, they have all just finished paying off their mortgages and not working as they are self-funded retirees. Even though their incomes have halved, they don’t have to sell as they don’t have mortgages on their homes and are living comfortably in their $6 million homes!

It is because there are so many factors that influence property prices that you might find that they go up, even though unemployment is increasing. Consider the situation we are in right now. COVID-19 has created a recession and unemployment is on the rise. However, Australian property prices have proven to be resilient once again as they have not plummeted and in most cases are still rising, albeit at a slow pace.

There are a number of reasons for this.

Firstly, both demand and supply are low. Even though there aren’t many people looking to buy property at the moment, there aren’t many people selling property. Secondly, those people with jobs still have the capacity to borrow and are willing to buy. Let’s not forget that even though the official figures show that unemployment has risen from 5% pre COVID-19 to currently 7%, there are still 93% of eligible workers still working. The vast majority of people are still employed (or at least on JobKeeper).

As already stated, there are many factors that influence property prices. In my opinion, the two biggest factors that have the greatest influence are availability of credit and consumer confidence.


Availability of Credit

Let’s imagine that banks were really slack with their lending practices and they were lending to anyone and everyone, even the unemployed. You might think that this is not possible but this is exactly what happened in the USA about 15 years ago. It all came to a head in 2007/2008 when these slack (and unethical) lending behaviours caused the Global Financial Crisis (GFC).

You can imagine what demand this created in the property market, with lots of buyers looking to purchase not just one property but many properties. With demand increasing rapidly, prices also increased quickly, creating a property boom which soon turned into a property bust and economic catastrophe, not just in the USA but globally.

In simple terms, if you lend lots of money to lots of people, property prices will go up, lots!


Consumer Confidence

Consumer confidence is also critical in the health of the property market. If consumers are happy and confident, mainly because they have a job and their property is increasing in value, they are more likely to spend money. They will spend money on a wide variety of items and activities, from dining out more often, going on expensive holidays, buying holiday homes and investment properties and importantly, upgrading from their existing home to a bigger and/or better home.

The same is also true for the opposite. If consumers are unhappy and not confident, they will not spend their money but save it, until when they feel the time is right and they will start spending again.

In summary, there are many influences on property prices. You can’t just focus on one aspect and disregard other factors. Wage growth is important in regards to property prices but there are so many other factors that need to be considered.


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