The AMP.NATSEM Income and Wealth Report: Prices these days! The cost of living in Australia explores how living costs have changed since 1984 finding that average income growth for Australian households across all income and socio-economic groups more than covered the cost of living over this period. To read the full report, click here.

However, cost of living pressures continued with strong price growth since 1984 across everyday essentials including electricity, which increased 253%, rent prices grew 223%, mortgages increased 256%, petrol increased 208% and public transport costs jumped 287%.

This growth was partially offset by dramatic drops in audio visual and computing, which now cost one tenth what they did in 1984, while average prices for clothing, footwear and major household appliances have changed little, and are often lower today than 27 years ago.

Key findings

• We’re spending more on discretionary items – the highest income households are spending around 30% on basic necessities and 45% on discretionary items, while the lowest income households devote 30% to discretionary items. Overall households are spending a greater proportion of income on services such as private schooling, restaurant meals, childcare and tertiary education.
• Incomes have outpaced the cost of living across the board since 1984 – couples with children have seen their income grow by 37%, single parent incomes have grown 34% and working families 22%. The smallest increase was rental households who experienced only 11% growth. On average, households are $224 per week better off than in 1984.
• The cost of services have increased strongly since the 1980s – education expenses for secondary students have grown by 264%, or 4.9% per annum, mostly attributed to higher private school fees. Medical, dental and insurance costs have increased at even greater rates, jumping 560%, 356% and 346% respectively.
• The costs of many imported goods shrank since the 1980s – the lower or stagnant prices of clothes and footwear, computing and audio visual equipment have all helped to offset price increases in other areas. The biggest change has been in audio visual and computing, which has fallen 90%.
• Work demands have driven increases in childcare spending – childcare is an example of the real nature of cost of living pressures. Demand for childcare has increased significantly since the 1980s with households spending more than double on these services in just six years.
• Australia’s petrol prices are among the lowest in the world – only Canada, USA and Mexico have cheaper petrol prices in the developed world. Australia’s average unleaded petrol price of around $1.40 per litre is significantly cheaper than most European countries where petrol can cost more than AUD$2 per litre.
• Sydney continues to be the most expensive city to live in – Sydney is the most expensive capital city to live in, costing on average, $71,426 for a standard ‘Sydney’ basket of goods per year, or $1,374 a week. For that same basket of goods, Adelaide is the cheapest costing the average household $4,442 per year less than Sydney. Canberra has the highest standard of living taking into account both average costs and income, followed by Darwin and then Perth.
• Sydney and Melbourne are two of the most expensive cities in the world – as our currency has appreciated over recent years, so has our place in the international cost of living index. Sydney and Melbourne sit 7th and 8th respectively on the index, making cost of living for the international worker 45% higher than in New York. However offsetting this, Sydney and Melbourne also enjoy some of the highest incomes.

AMP Financial Services Managing Director Craig Meller said the AMP.NATSEM report shows households today are more focused on lifestyles and aspirations than they were in the 80s.

“Many Australians are leading busier lives and facing greater demands on their time which means we’re now paying for things we may not have previously, such as childcare, gardening and housekeeping.

“We’ve also seen a noticeable shift in spending habits with people spending more on education, holidays and eating out. Essentially we seem to be leading bigger lifestyles, all of which can add to perceived cost of living pressures.”

NATSEM lead author of the report, Principal Research Fellow Ben Phillips said that strong economic growth in Australia since the early 1990s has led to Australia having one of the highest standards of living in the world.

“While there is little doubt that many families still struggle to make ends meet, this report shows that on average, Australian households, both high and low income, are financially better off than in previous decades.

“Cost of living pressures are more related to our increased expectations and the greater demands from a modern society than the prices we pay for petrol or electricity.”

Since 2002, AMP and NATSEM have produced a series of reports that open windows on Australian society, the way we live and work – and our financial and personal aspirations. AMP publishes these reports to help the community make informed financial and lifestyle decisions and to
contribute to important social and economic policy debate.

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The index is based on historic and recent consumer attitudinal data collected by Genworth and shows homebuyer confidence across Australia has dipped by 1.5% since September 2010 – the second consecutive fall since the launch of the index last year.

“This fall, despite Australia’s relatively strong economic performance was driven by decreased confidence in the natural disaster affected regions of Queensland and Western Australia (WA) coupled with growing concern amongst Australian homebuyers about the rising cost of living,” said Genworth CEO Ellie Comerford.

Natural disasters hit Western Australia and Queensland sentiment

Disaster-impacted borrower sentiment in Queensland and WA was the primary driver behind the index fall, without which the index would have risen by 0.8%.

Queensland was by far the worst affected, with one in three Queensland respondents impacted by the natural disasters in some way, compared to a national average of 14%.

Genworth Hardship data reflects this trend. Total Hardship requests in early 2011 increased by over 70% compared to the same period last year and nearly half (40%) of these requests were natural disaster related.

Most of those affected by the recent natural disasters were fairly optimistic about the recovery with 60% expecting to recover in two months or less. However, one in five believes they will be affected for more than six months.

Awareness of Government relief programs was strong with most homebuyers (78%) aware of relief initiatives. Borrower awareness of lender hardship relief measures was lower at 39%, but over 60% of borrowers using lenders hardship initiatives were more than satisfied with the service and support they received.

“Genworth has worked with lenders to deliver hardship assistance in the wake of natural disasters, and is pleased to find the majority of people that used these solutions were satisfied with the outcomes.

However, flood affected borrowers are telling us they expect to struggle for longer and we are working with lenders to introduce more relief to affected borrowers in the longer term,” Ms Comerford said.

Mortgage stress increasing – Rising costs of living the biggest worry

Overall, the report findings show that debt levels did not change between September 2010 and March 2011 with 27% of Australians putting half or more of their monthly income to paying off debt. However, more borrowers across Australia experienced mortgage stress at 21%, up from 15% in 2010.

The causes of mortgage stress have shifted over the last six months, with borrowers now seeing the rising cost of living as the biggest hurdle to meeting repayments rather than interest rate hikes at 66% compared to 51% respectively.

“Expectations for a relatively stable interest rate environment contrast with soaring food and petrol prices, moving the rising cost of living to the front of borrowers’ minds,” said Ms Comerford.

First homebuyers more anxious about repayment ability

Despite some concerns that first homebuyers had over-committed to high debt levels while generous first homeowner incentives were available, this segment is faring well with above average levels of confidence. However, this result masks the fact one in three first homebuyers spend more than half their monthly income on servicing debt, compared to only 27% of average homebuyers.

Also a concern is first homebuyer outlook for the year ahead, with 24% expecting to find it difficult to meet repayments over the next 12 months compared to the national average of 19%.

“Although first homebuyers are confident, they are most concerned about interest rate rises in the coming year. This reflects the trend of rising property prices forcing them to take on bigger loans to realise their dreams of home ownership,” Ms Comerford noted.

Outlook

Despite an overall drop in borrower confidence and increased mortgage stress, more homebuyers are upbeat about the property market this year, with 38% of those surveyed viewing 2011 as a good time to buy a home (up from 25% in 2010).

However, homebuyers are pessimistic about their ability to repay their mortgages, with the rising cost of living and threat of future rate rises weighing heavily on their minds.

“Genworth will continue to provide the market with valuable insights into the attitudes and sentiment of homebuyers and would-be borrowers. We anticipate the effects of the recent natural disasters will continue to put downward pressure on borrower confidence over the coming six months,” Ms Comerford said.

Click here to download a full copy of the report.

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