I’ve heard it said fairly often over the last few years that the cost of living in Australia is a “dead set joke”. We’ve certainly become a high cost country, although having visited Britain over the past month I can attest that the costs of some goods are worse elsewhere.
Is the cost of living in Australia spiralling out of control?
Ask a macro-economist and they will tell you: “Definitely not”. They would say that we as Australians are collectively suffering from Fisher’s Money Illusion and highlight that since 2003 the poorest fifth of households are $42 better off and the richest fifth $576.
The ‘Money Illusion’ concept dictates that we instinctively focus on nominal price increases rather than real price movements after accounting for inflation.
The latest round of inflation data lends support to this argument, showing inflation to be tracking comfortably in the middle of the targeted 2-3% range, which is well below the 3%+ wages growth reported for the past 12 months.
I suspect however, that if you asked the average ex-mining single-income earner outside of Western Australia, they would tell you that their wages are not growing and that the cost of living has outpaced incomes.
The ABS is an independent body and has no reason to distort results deliberately, rather the reality is that looking at average figures gives you an average result.
Wages growth has been weak for some time now in retail trade, real estate services and healthcare, for example, while it has been considerably stronger in mining, wholesale trade and, to a lesser extent construction.
As we might expect, wages growth has been very strong in Western Australia, with very high wages being paid to those completing the construction of new mining projects, but wages growth has been consistently notably weaker in South Australia than in other states for some years now.
Naturally the CPI figures show that the cost of some goods has increased more than for others. We might expect to see the weaker Aussie dollar introducing a new bout of inflation in the coming quarters.
Don’t forget that yesterdays figures are retrospective and some of the figures relate back to what was happening at the beginning of April. Petrol prices, for example, will be reported as significantly higher next quarter, barring surprises.
The good news for Australians is that personal wealth has increased considerably over the past year.
Stock markets have been flying, with valuations moving up by close to 20%, which correspondingly has increased the value of pension pots.
Property market prices have increased strongly in most capital cities which benefits owners, although not renters (rents were reported as having increased by 1.1% this quarter).
The stark reality is that developed economies have a policy of promoting inflationary economies and it is important to have a financial plan to protect yourself from the silent thief.
[sam id=35 codes=’true’]Over time owners of property are likely to fare better than renters. Those who own quality share portfolios consisting of profitable, dividend-paying companies which which can grow returns on equity will see their income and wealth outpace inflation. Others will look to A-REITS or farmland as assets which can represent an inflation hedge.
A point I raised back in 2011 when I wrote my book was that with a growing awareness of and concern about the impact of pollution on the environment, any leniency which Australian governments had towards the taxing of petrol in past will disappear. My suggestions included owning properties in locations close to key transport hubs and links and to find ways to avoid driving.
This may be already unfolding: petrol prices are now at their highest level since 2008, with no signs of the increases abating.
I also expect to see the prices of alcohol and tobacco (smokes +3% in this quarter alone) increase over time too due to the related costs of healthcare.
If you’re serious about property investment please join me and a group of property and tax experts at my upcoming Property Market and Economic Updates that I’ll be conducting in 4 states in August and September 2013
I will be presenting a heap of BRAND NEW content I haven’t discussed in public before. I guarantee there will be several things I reveal that you are not doing and you should be!
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If you want to cut through all of the media hype, and all the contradictory predictions, and finally learn the truth (good and bad) about what is going to happen to the Australian property markets, this seminar is exactly for you… Click here now to get more details and reserve your seat.
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