How Expensive is Australia?

ANZ SummerI have written many articles about the cost of living here in Australia on this website. But a few months ago, I realised I hadn’t written anything about the same subject for my monthly column in Australia and New Zealand magazine.

So I decided to put that right, and starting in their “summer issue”, which came out just over a month ago, I began the first of a trilogy comparing the cost of living between the UK and Australia.

I gave it a working title of “How Expensive is Australia?”, They called it…

Money, money, money

Money,money,money.

Many people believe Australia has become very expensive over the last few years, to the extent where it is actually putting people off of a move. What’s the truth? Look no further than one of the hottest and most contentious subject of all, house prices compared between our two countries.

Five years ago, during 2007 and before Northern Rock scared the living daylights out of their investors, one GBP would buy 2.5 Aussie dollars. These days you get just 1.5 Aussie dollars to the pound. So back in the good old days, if you sold your house for £200,000, you could convert that into $500,000 AUD and buy a much bigger house down under.

But today, your £200,000 gets just $300,000 AUD and you will struggle to buy anything decent for that. But have house prices risen massively in Australia? No! Over the same period, they’ve probably remained flat.

But based on those calculations, it’s easy to believe house prices here in Australia are now more expensive than in the UK. But if we take the median price of an Australian detached residential dwelling, $460,000, and divide by average annual income, $69,000, we get 6.6.

So, theoretically, if you paid none of that silly tax stuff, didn’t buy any food or anything, but simply paid all of your wages towards your house with a mortgage that had no interest, it would be paid off in less than 7 years.

Let’s do the same maths for the UK. The average price of a detached house is £317,000, divided by average salary, £26,200, and we’re now looking at 12 years. So, I would suggest, buying a house for Australians, living here in Australia and earning Australian dollars, does seem cheaper, doesn’t it?

There is a flaw in my figures that would make economists wince. I have mixed median prices in Australia with average prices in the UK. But the only un-biased source here on house prices is the governments’ Australian Bureau of Statistics. They only talk in medians, but I’d rather go with their figures.

On the plus side, I have compared detached houses with detached houses; our governments provided the average salaries figures and the BBC was my source for UK house prices. So I haven’t made it up, I believe this example perfectly highlights what is really going on.

Australia hasn’t suddenly become very expensive; the great British pound has simply become a weak currency against the Aussie dollar.

The lesson to learn from this is never simply convert GBP to AUD to find out how much something costs in Australia. It will scare the life out of you! Instead, work out how much you would earn an hour in Australian dollars here in Australia, then how long you would have to work to buy the item. Then compare that to how long you would have to work in the UK to buy the same thing.

I call it the ‘hard yakka’.

Here’s a quicker formula: How much would you need to earn in Australia to have at least as good a lifestyle as you currently have in the UK? Rule of thumb; whatever you earn in pounds, double it in Australian dollars, easily done, see average earnings, and as we say here, ‘she’ll be right’.

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{ 5 comments… add one }
  • Chris November 15, 2012, 11:36 pm | Link

    Bob, I’m a Kiwi and since leaving NZ in 1998 have lived in London (2x), Sydney (3x), and Melbourne, and even went back to NZ for 18 months but left last April to come back to the UK (Berkshire) and settle for good. We’ve owned 4 properties in that period across all 3 countries, 2 in Sydney.

    Australia is expensive, and I think your analysis is fundamentally flawed by selection bias by choosing to base your comparison on detached houses only. As you’re fully aware, the make up of UK housing stock is very different from the Australian market with respect to the ratio of fully detached homes to ‘other’ types which is reflected in the the typical ascent of the property ladder. Far fewer people here ever own a fully detached home, but that in itself is no measure of the relative level of comfort and quality of life style they may be lving in.

    More importantly however, as an observer and commentator on the comparative costs of one country vs the other you’re undoubtedly aware of the Demographia report which is produced every year which painstakingly does this analysis for you, city by city.

    This year the gross comparative country Median Mutipliers are Aus: 6.7 (you’re close), UK: 5.0 (not the biased value of 12 you have arrived at).

    But it doesn’t stop there, take a look at the other big cost of buying a home, the finance cost. I’ve currently got a 1.99% tracker over the base rate which is still 0.5%, and likely to remain so for quite some time.

    Assuming a 50% mortgage of $250,000, the rate I’m paying here equates to $1120 per month compared to $1520 per month for 5.4% I yr fixed which is one of the cheapest rates I could find in Australia. That’s a 35% difference per month and is all interest. If you use 6.4% which is representative of variable rates, then the monthly payment is $1672, or 49% more per month.

    We could also discuss urban public transport in the big cities, housing market bubbles, and whose has burst and who’s hasn’t and how that affects relative affordability and capital gain potential, but I think you’re getting the picture, and if you share this, perhaps your readers will too.

    • BobinOz November 26, 2012, 2:13 pm | Link

      Hi Chris

      I think we will have to agree to differ on the detached house choice thing, what I have done is compare like for like in my example, I believe that is the only way to do it. I don’t think you can really compare 2 bedroomed mid-terraced house directly with a detached house with 4 bedrooms and a double garage.

      We do have apartments, units and some semi-detached houses here, and England does of course have semi-detached, mid-terraced, flats and apartments. As the majority of housing here in Australia is detached, I compared detached with detached.

      I wrote an article recently about a new wave of housing being built here, prices started at $204,950. You can read about it by clicking Houses in Australia: Terraced and Semi’s.

      These houses do compare with many houses in the UK, but there just aren’t enough of them here to make a sensible comparison. So I stand by my decision to concentrate on detached housing.

      As for the mortgage rate, that’s a different story and yes, mortgage rates are higher here in Australia than in the UK. But this article doesn’t cover the cost of financing houses, only the cost of the houses themselves.

      Thanks for giving us your perspective though, it is information people should be aware of.

      Cheers

      Bob

  • Simon Smith November 15, 2012, 4:30 pm | Link

    Its those changes to pricing structure on websites that is causing headlines, if you physically flew to the states, walked into a shop and saw an item for $30, then simply said you lived Australia and saw them increase the cost to $80 at the checkout for no reason you would question that, same shop, same product, but different price, that’s whats happening now on websites.

    It used to be that changing location on a website simply gave the same cost in a different currency and we only saw the shipping increase, after all if your buying from the US, UK, China etc they buy at a certain cost and sell at a certain price based on their cost and profit margins, not these days though websites are actually inflating pricing for different markets. Its not right.

    A bit of a rant there sorry, but I work as a web developer for an international wine business so I’m all to aware of the issue here, and as a Brit one year new to Aus I still shudder at seeing the same products so overpriced.

    • BobinOz November 16, 2012, 12:16 am | Link

      Hi Simon

      You have got a point, in fact you’ve made many valid points, but I do think it is a totally different argument. What I am trying to say is Australia isn’t as expensive as many people think because salaries are higher, so you don’t have to work quite so long to get what you want.

      The issue you are mentioning, which is valid, is the difference prices companies charge for the goods in different countries. But I think we’ve been stuck with this for years, we’ve all heard the term “what the market can bear” and that’s what companies want to sell their stuff for.

      Like yourself, I do think it stinks a bit, but then so does the old DVD regions trick. If I buy a DVD in England and then moved to Australia, why should I have to buy that same DVD again because I’ve moved to a different region? The obvious answer is, I shouldn’t. And the real answer is, I wouldn’t!

      I wouldn’t because I know I have already paid for that DVD and I sure ain’t going to pay for it again. I could pay more for my DVD player, and buy a multiregional player, but then again that’s another rip-off, isn’t it? So instead, I could search online for a DVD hack, to turn my regional player into a multiregional player. Now I will be able to watch my DVD again.

      Is that illegal? Who cares, it’s free and I think it should be illegal to make us have to buy those DVDs again just because we’ve moved.

      Unfortunately, companies are in the business of making money and as much of it is possible. We are the exploited, and companies always want us to pay what we can afford and I think we are stuck with that. But as I say, I think it’s a totally different argument than the one I’m trying to put across with the hard yakka.

      By the way, my wife recently went back to England and asked me if there was anything I wanted brought back. I checked online the prices of a few small electrical gadgets that I wouldn’t have minded owning, and even I was shocked to see that actually, they were cheaper here in Australia. So I didn’t ask for anything. Maybe I was looking at the wrong gadgets.

      Cheers

      Bob

  • Simon November 15, 2012, 3:46 pm | Link

    I’d still argue with this logic of using how long it takes to buy the same item, In pure house terms you are indeed correct, however houses are pretty solid, stay in one place kind of affairs, they are truly tied to wages, they are built, owned and sold according to locale and market forces, what people can afford, number of buyers etc, its in fact a closed local market.

    But what’s making people wince about the prices here is that although the aussie dollar is much stronger, that increase in fiscal strength hasn’t passed down to a vast number of imported products. Products that are imported should be significantly cheaper than they were. But they aren’t, in fact saving havent been passed on at all.

    Product manufactured at one price in say the US or China are in fact being sold at vastly inflated prices here compared to elsewhere.

    Prime examples are Computer games (Take the same game … here $88, $40 if purchased from the UK), same for DVD’s, computer equipment, and cars, items that are manufactured in the same place, but sold here with big inflated price tags, I bought a blue-ray disc of a BBC series from a UK seller for £20 but looking for the same box set cheapest could find advertised was $120. Its not related to costs any more it’s about how you can get away with charging.

    Thats why people are being encouraged to trick websites from the likes of Apple to shield there location, if you look at a product on the Apple website, the item appears at vastly differing prices purely by changing your geographic location, its in fact shipped from the same place in the US, but the same product suddenly increases 30% just by letting the website identify you as an Aussie customer, its not about shipping costs as your paying shipping on top of the price.

    Its that completely disregard for currency conversion that is causing the issue, so yes the item may equate to shorter time working to be able to buy, but companies are simply charging people in Aus more.

    I also think having essentially a duopoly of big supermarkets doesn’t help either, its that lack of competition, that essentially leads to massive price fixing in my opinion, all the want to do is simply slightly undercut the other rather than charge based on cost of procurement and specific percentage markup, but inflation only works one way it seems, prices go up when costs increase but never go down. Its just with internationally based websites, and being able to see the shift in cost via google etc it simply impossible to miss the ripoff.

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