Cost of living killing home ownership dreams

Whenever we discuss the challenges facing Australian home buyers more often than not we focus on interest rates and house prices. And that's fair enough because home loan affordability (not to mention the availability of finance) and the cost of homes (including add-on costs like stamp duty) are two key factors which combine to determine whether or not you'll have a realistic chance of becoming a home owner.

Living costs are negatively impacting the Australian way of life

But I believe there is an even bigger and more urgent challenge facing prospective home owners, and that is Australia's ever increasing cost of living. And I'm not talking about the cost of expensive or luxury items. I'm talking about basic living costs like food, water, power, petrol and the other essentials we need to live.

The extraordinary increases in the cost of things like water, gas, fuel, public transport, electricity, insurances and even going to the movies is putting enormous pressure on everyone – home owners and renters, young and old alike. In fact, more and more family and household budgets are under so much stress these days that many are finding it harder to meet basic everyday living and lifestyle expenses, let alone finding the cash to pay rent or meet home loan repayments. And what is particularly concerning is that even middle class families are finding the Australian way of life that much more difficult to fund. And let's not forget our pensioners, many of whom are relying on sponsorship programs and charities to get three decent meals a day.

With an ever increasing cost of living it's hard to rationalise the movements in the CPI which indicate we're living in a relatively low inflationary environment, with price increases coming in at or slightly above the top end of the RBA's target inflation range of between 2% and 3%. This is because most of us experience cost increases far exceeding CPI increases. In fact, I would be ecstatic if prices were only going up by around 3% a year. There seems to be a big disconnect between how much prices are going up according to the RBA and how much extra we're actually paying.

So for those looking to enter the property market it's going to be a tough road ahead because among other things, saving a deposit is, and will continue to be, that much harder due to the erosion of one's purchasing power resulting in less spare cash to save.

Australia is now one of the most expensive places to live in the world

I believe the lack of correlation between the cost increases we're experiencing through our hip pocket and movements in the CPI is exemplified in the Mercer 2011 Cost of Living Survey. This survey, which is based on over 200 items including housing, transport, food, clothing and household goods across five continents and 214 major cities, concluded that Australian cities saw some of the most dramatic jumps in cost rankings. While a fair component of this can be attributed to the strength of the Aussie dollar against the US green back (because the survey is based in US dollars) it nevertheless points to some significant growth in prices across the nation. The table below says it all:

As can been see there have been some pretty big increases over the past twelve months. And this is one ranking we'd prefer to be down the bottom of rather than near the top, especially with our six major cities among the 46 most expensive in the world – with Sydney closing in on a top ten appearance.

(For the record, the top ten most expensive cities in the world in 2011 were: 1. Luanda - Angola, 2. Tokyo – Japan, 3 Ndjamena – Chad, 4. Moscow – Russia, 5. Geneva – Switzerland, 6. Osaka – Japan, 7. Zurich – Switzerland, 8. Singapore – Singapore, 9. Hong Kong – Hong Kong, 10. Sao Paulo – Brazil)

Governments must act to make Australia an affordable place to live

So what can be done to fix the problem? Sure, we can ask everyone to tighten their belts but I fear if they're tightened any further we'll be cutting off the circulation to the country's economic wellbeing not to mention the Australian way of life. I think this is a case for the Federal and State governments to stand up and be counted and take responsibility for ensuring we are not paying too much for life's essentials.

In particular, governments must ensure they spend taxpayer money wisely, aim to simplify and reform the taxation system and look for ways to make housing more affordable. In other words cut out waste, put more money in the hands of hard working individuals and families, support those in need, and help make housing (for owner occupiers and renters) more affordable.

Do you think Australia is an expensive place to live? Do you believe the CPI really reflects the cost increases we all experience? What costs do you think have gone up the most?

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Peter Boehm's first book, The Great Australian Dream: A Guide to Buying Your First Home, is available online and at all good bookstores. It discusses the numerous challenges Australians face in entering the property market as owner occupiers and investors and provides straightforward advice, hints and tips on getting past them.