A weakness in wage rises poses a bigger threat to economic health than declining property prices according to Australia’s Reserve Bank governor, who told a parliamentary committee late last week that employees need to be paid more to address the imbalance.
RBA governor Philip Lowe appeared before the House of Representatives Economics Committee on Thursday to put forward his theory that stagnant household income could lead to a drop in consumer spending and negatively impact the economy during the next twelve months.
‘Aggregate household income used to grow at 6 percent, it’s growing sub-3,’ Dr. Lowe said during his speech to the committee. ‘That’s a big difference, and you accumulate that over three or four years and income is 8, 10 or 12 percent lower than it otherwise would have been.’
He added: ‘Many people borrowed assuming their incomes would grow at the old rate and they haven’t. They’re having more difficulty, they’ve got less free cash and so they can’t spend, so this is why I’ve put so much emphasis on the need for a pick-up in wage growth.’
Dr. Lowe also said the recent house price crash in major cities including Sydney and Melbourne was not a great surprise, though it had come ‘almost a decade too late.’ He said the price boom seen during the last decade was unsustainable and that the latest fall is merely a ‘supply response’, albeit a correction that should have happened earlier.
Dr. Lowe dismissed suggestions that big cities on the east coast now have a surplus of properties after years of concerns that there was not enough to house a rapidly growing population. He noted that there was no evidence of ‘overbuilding’ in Australia or that there are signs of ‘fundamental disequilibrium’ in the supply and demand of properties.
The RBA governor added that while there may be too many apartments in Sydney, the housing market is in a good place and that falling prices will enable new households to form and more sustainable purchases to be made. The recent adjustment is not expected to knock the economy off course either, according to Lowe.
Rather than focus on property prices, Dr. Lowe would prefer to take a closer look at household incomes. He said the RBA had been doing its part by keeping interest rates in check for an extended period to reduce the pressure on homeowners, while Lowe himself has delivered impassioned speeches to push the message of possible wage increases.
The strategy has seen a degree of success as unemployment rates near record low levels and wage growth has finally inched higher after the recent nadir. However, he said the Fair Work Commission and employers could do more to ensure workers are paid more in their roles.
Dr. Lowe said the recent 3.5% pay hike for those on minimum wages was a step in the right direction and commended Fair Work for implementing a ‘sensible and right policy.’ He believes a similar rise would also be preferable this year. Lowe added: ‘If workers get their normal long-run share of that [productivity increase] then their real wages should rise by 1 percent a year.’
New figures released last week showed wage growth is still relatively weak, rising just 2.3% for the whole of last year. Indeed’s Asia-Pacific economist Callam Pickering said growth was ‘heading in the right direction’ but that it would be difficult to claim that the uptick is ‘strong or even solid.’
Dr. Lowe added that unemployment could fall to near 4.5% before there were any concerns about a sharp rise in inflation or the spectre of interest rate rises.