A tale of two cities amid cost-of-living crunch
South Australians fortunate to own their home are spending and boosting business, while circumstances get tougher for renters and mortgage holders caught in a vicious cycle of rising bills and interest rates. Susan Stone says budget and policy decisions must walk a fine line to avoid entrenching haves and have-nots.
It is the best of times, it is the worst of times, to paraphrase Dickens’ A Tale of Two Cities opening line. And much the same can be said for South Australia right now, with two very different lived experiences playing out since the general lifting of COVID restrictions and our return to a more ‘normal’ existence.
While the COVID experience hit all of us in similar ways – or at least variations on the same theme – the recovery has done anything but.
The recovery has brought a surge in demand for travel, for restaurants and cafes; for entertainment as people were allowed to mix and social distancing became a thing of the past. Policy changes encouraged people to go out and buy things, including houses. And this they did, with the median house price increasing 37% in South Australia between December 2019 and December 2022.
This surge in demand for everything from brunch to buildings brought with it increasing demand for workers and materials. The demand greatly outpaced the ability of industry, still recovering from COVID, to supply, forcing prices up. Add to that a war in Europe which greatly affected energy and agriculture prices, a flood which greatly affected food prices and you had fast-moving inflation and a cost-of-living crisis.
However, the impact of these events is not playing out the same for everyone.
The return of overseas workers and students, and the longstanding shortage of housing, has led to both a rental crisis and a crisis of affordability. The almost 30% of South Australians who rent have experienced a fast growth in rental prices as demand has far outstripped supply. The median rental price in Adelaide grew 13% in 2022, Australia’s second-highest annual increase.
Meanwhile, buying a house remains out-of-reach for many South Australians. Housing prices in Adelaide, unlike much of the rest of the country, did not suffer big falls. The majority of suburbs in Adelaide have seen prices increase, despite rising interest rates. According to CoreLogic, both Adelaide and regional South Australia have experienced an increase home values in the 12 months to April 2023. The only other State or territory to achieve this is Western Australia.
For the 34% of South Australian homeowners with a mortgage, increasing interest rates have put pressure on already strained budgets. As the share of loans to house value have risen in South Australia, so have those borrowing at the margin of what they can afford. This means that more households will be unable to find cheaper loans because the combination of bigger mortgages and higher interest rates means they no longer meet the 3% serviceability buffer required by banks. According to recent work by Barrenjoey, this could affect between 25 and 30% of homeowners with a mortgage.
"The median rental price in Adelaide grew 13% in 2022, Australia’s second-highest annual increase"
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It is then no surprise that food bank activity and homelessness have reached record levels in South Australia. Over the past five years, homelessness has increased by almost 14% in South Australia. Food Bank SA estimates that one in six South Australian adults haven’t had enough to eat in the past year. More than 20% of South Australian households rely on government support for 90% of their income. This compares with less than 15% for the rest of Australia. And these allowances have not kept up with inflation, so there are a significant number of households whose real incomes are falling with little alternative sources to tap into.
Yet we see continued spending in South Australia on things like restaurants and travel. That is because a significant number (around 35%) of South Australians own their home with no mortgage. South Australian homeowners also have the lowest share of property loans in Australia. Property loans are about 86% of all debt in South Australia, compared with around 92% for the rest of Australia. To the extent these households earn money from investments or superannuation income, rising interest rates are good for them. And this is a relatively large share of the South Australian population. Investments account for over 12% of wealth of South Australian households, more than double elsewhere in Australia.
This spending is important for South Australian businesses. Indeed, only 55% of South Australian households rely on employee wages for their income, compared with 62% for the rest of Australia. That means more South Australians rely on business income and keeping these businesses afloat is a big part of the South Australian economy.
Taken as a whole, the next 12 months will be a tricky time for South Australian policymakers. They must address the needs of those who are truly suffering in this difficult time. Yet, they need to encourage spending to keep the economy going and do all this without adding unduly to inflationary pressure. The upcoming budget will be a key part of ensuring we don’t end up with the ‘haves’ enjoying the best of times while the ‘have nots’ falling ever further behind.
Dr Susan Stone is the University of South Australia’s Credit Union SA Professorial Chair in Economics
