Jack & Dianne on Struggle Street, Australia

What is an “average Australian”; what do they earn; how do they live; where do you draw the

line at OK and struggling? Skip to page 6 to see how Fuller Center for Housing draws the line

and addresses the problems Jack & Diane face on Struggle Street.

A couple of years ago, the government changed the rules so that families on $150,000 a year or

more wouldn’t be eligible to receive family payments. There were the predictable cries of ‘class

warfare’, but there were also claims that $150 000 in Australia leaves you struggling to make

ends meet. The Daily Telegraph found a couple on $150k who said “you can survive on

$150,000 but you definitely aren’t doing well,” while in The Australian, a couple on $200

000 said “the government are making it bloody hard.”

I don’t think most people have much of a sense of what the typical Australian’s income

is. Research backs this up – low income earners tend to overestimate their own position in the

income distribution, while high-income earners tend to underestimate theirs. In short, we all

think we’re middle class.

The chart below shows this quite starkly. It compares the actual income distribution, in which

10% of people are in each decile of income, with the results of a survey that asked people to

place themselves into income deciles.

The Australian income distribution: perception and reality

Source: Saunders and Wong (2011)

You can see that 83% of people think they’re in the middle four deciles of the income

distribution, when of course only 40% are in the middle.

Peter Martin recently wrote about this phenomenon after a reader took umbrage with his

(perfectly defensible) claim that a pre-tax income of $210 000 makes you ‘ultra-rich’.

It’s this widespread misperception that led me to write a fairly dry post a few years ago setting

the record straight about the typical Australian’s income. Since then, the battler threshold has

apparently been raised, such that “you can be on a quarter of a million dollars family income a

year and you’re still struggling,” according to Labor backbencher Joel Fitzgibbon.

Tomorrow’s Budget, if the past few are a guide, will contain some measures that attract the

‘class warfare’ tag and bring out the $250k battlers, so I thought this might be a good time to

update the numbers in that earlier post and set out the facts on Australian incomes.

What is the typical Australian worker’s wages?

Among full-time workers, the average wage is $72,800 per year. But remember – the average

(i.e. the mean) gives a misleading impression about what the typical worker earns. It is pushed

upwards by the large salaries of a small number of very high income earners.

The median gives a more accurate sense of the typical worker’s wages. If you earn the median

salary, your wage is in the middle of the distribution – it’s higher than 50% of workers and lower

than the other 50%. Among full-time workers, the median was $57,400 in August 2011, which is

the most recent figure.

Even this figure, though, is a little higher than the typical worker’s wage. That’s because it

doesn’t include the 3.5 million people who work part time. When you bring them into the fold,

the average wage drops to $56 300, and the median drops to $46 900.

What is the typical taxpayer’s income?

Not everyone has a job – a little less than 62% of adult civilians over the age of 15 had a job in

April – so the figures on average wages don’t apply to everyone. Instead of just looking at

workers’ wages, then, we can look at the statistics on taxpayers’ incomes to get a sense of the

typical income.

According to the tax data, the median taxpayer had a taxable income of $48 684 in 2010-11, the

latest figures the ATO has made available.

Here’s a summary of the ATO’s data for 2010-11:

If your 2010-11 taxable income was…

…then your income was larger than this

proportion of taxpayers

$48 864 50%

$72 948 75%

$79 934 80%

$89 331 85%

$105 461 90%

$140 479 95%

$202 918 98%

$281 858 99%

These figures only include people who paid income tax, so while they’re useful, they’re far from

ideal. To get a clearer sense of the typical Australian’s income, we need to include everyone, and

we need to look at households rather than individuals.

What is the typical household’s gross income?

All the figures above were for individuals, but most of us live with other people and pool our

resources with them to some extent. To get a more accurate sense of the typical Australian’s

income, we need to compare households. We’ll look first at the gross (ie. pre-tax) incomes of

households, without adjusting for the size of those households.

In 2009-10 (the latest ABS figures), the median pre-tax income of Australian households was

around $68 800.

If your household’s gross income in 2009-

10 was…

…then your income was larger than this

proportion of Australian households

$68 828 50%

$130 305 80.1%

$156 376 86.8%

$208 519 94.4%

$260 662 97.1%

So a household with a gross income of $250 000 in 2009-10 would just miss out on the top 3%,

but would almost certainly be in the top 4% of households ranked by gross income.

What is the typical household’s net income, adjusted for household size?

A single adult living alone and earning $100 000 per year will have a higher material standard of

living than a couple with the same income. So if we’re concerned about measuring material

standards of living, we can’t say that the single adult and the couple on $100 000 are equal.

Instead, we need to adjust the figures for household size. You might think that this is

straightforward – the couple has to share $100 000 between the two of them, so simply divide the

number in half and you’ll have your adjusted income figure.

But it’s not as easy as that. If you live with a partner, your household costs aren’t double those of

someone who lives alone. To account for that, researchers usually use something called an

‘equivalence scale’ to compare incomes between households of different sizes. Using the

standard equivalence scale, you’d divide a couple’s income by 1.5 to compare it to the single

adult. A couple household would therefore need to have an income of $150 000 to enjoy the

same standard of living as someone living alone on $100 000.

All the figures above also referred to wages or incomes before income tax. If we want to

compare material standards of living between households, a better measure is the disposable (ie.

net, or post-tax) income of households.

The latest ABS figures for equivalised household disposable incomes are from 2009-10,

but NATSEM has published estimates of these figures updated to December 2012. According to

NATSEM, the median equivalised disposable income for Australian households was $43 100 in

December last year. That means that if you were a single person living alone who took home

$43k in 2012 after income tax, then your material standard of living was higher than 50% of the

population, and lower than 50% of the population.

To convert that $43 100 figure for different household types, just use the equivalence scale. For

example, a childless couple would need 1.5 times that amount to attain the median standard of

living – that’s $64 650. Each child in the house adds 0.3 to the calculation, so a couple with one

kid would need 1.8 times the single person’s income to have the same standard of living – that’s

$77 580 at the median.

This is the key table for comparing net household incomes:

If your household contains… …then your

income is

higher than

this

proportion

of

Australians:

A

single

adult

Two

adults,

no

children

One

adult,

one

child

Two

adults,

one

child

Two

adults,

two

children

…and your disposable (after-tax) income is…

$26,100 $39,150 $33,930 $46,980 $54,810 20%

$34,000 $51,000 $44,200 $61,200 $71,400 33%

Median

$43,100 $64,650 $56,030 $77,580 $90,510 50%

$53,300 $79,950 $69,290 $95,940 $111,930 66%

$63,900 $95,850 $83,070 $115,020 $134,190 80%

$94,600 $141,900 $122,980 $170,280 $198,660 95%

The typical Australian income, after tax, is $43,100 for a single person, or $90,510 for a couple

with two kids. If you’re on a quarter of a million, you might find it hard to get by if you’ve over-

extended yourself, but your income is higher than the vast, vast majority of Australians.

Note: When I refer to income as your ‘material standard of living’, I’m ignoring the value people

derive from consuming their assets, such as living in owner-occupied housing. That’s an

important issue, but beyond the scope of this post.

Matt Cowgill. What is the typical Australian’s income in 2013? We are all dead.

A discussion of Australian political and economic issues and ideas, by Matt Cowgill.

Blog post May 13, 2013

http://mattcowgill.wordpress.com/2013/05/13/what-is-the-typical-australians-income-in-2013/

The Fuller Center Ownership Model

At Fuller Center for Housing, Queensland, Australia, we qualify people at below 70% of median

income. If Jack & Dianne and their 2 kids have a yearly household disposable income below

$63,357 they can apply. Other criteria apply; they must be willing to partner with us and put in

500 hours of sweat equity; their current living conditions are substandard, i.e. crowded,

dilapidated, or rental above 50% of their income. At the above rate, based on repayments capped

at 25% of income, their repays would be $304.60 a week. An affordable house is classed as

1000 x weekly repayments, i.e. 20 years mortgage. On the Fuller Center equity share model of

70/30 split, Jack and Dianne (and FCHQA) could afford a $435,143 house. FCHQA equity share

of $130, 542 decreases by 1% p.a. So at the end of Jack& Dianne’s 20 year mortgage period

FCHQA still has a 10% equity in the property. J&D can at that point pay a balloon payment to

cover the 10% or they can wait 10 years till it decreases to 0%. They can increase their mortgage

payments at any time during the mortgage period to buy down the FCHQA equity. For example,

they could pay $435 a week - 28% of their income (an extra $132 a week) and that buys out

FCHQAs equity share totally. We would not encourage them to do this until their income

increased to $90,480 so the repays would still be at 25% of income. If they refinance or sell the

home any time during the mortgage period FCHQA recoups whatever the equity share is at that

time. For example, after 5 years Jack & Dianne decide to move on for whatever reasons (Job

opportunities, better schools for kids, divorce) and the house is sold for $500,000 (based on less

than 3% appreciation rate). FCHQA would get 25% of the equity ($125,000) as per the second

mortgage and the balance of payments of $226,560 = total $351,560; Jack & Dianne get

$148,440 minus their payments over 5 years of $79,196 = $69,244 as opposed to a situation

where they would have been only renting that house for $435 a week for 5 years for zero return

on an outlay of $113,100.

At the low end of the scale Dianne is a single mum with one kid; disposable household income is

$33,930. Repays of 25% of income = $163 week. Extending the mortgage period to 30 years

would mean Dianne and FCHQA together could afford a $363,257 house.

Market Value versus Cost is where Fuller Center need to be nimble.

A house with a market value of $435,000 on developer’s rates would need to cost less than

$313,200 to build and finance, allowing for the developers 20% margin and 8% marketing fee.

Take out financing costs of around 5% and we are down to $297,540. For a standard 120m2

Fuller Center home, materials costs are around $480m2 ($57,600), labour costs are around $360

m2 ($43,200), Taxes, Fees and Permits are around $240m2 ($28,800) leaving $153,000 for land.

Fuller Center for Housing works with Faith Groups, Churches, Community Organisations as well

as builders and trade suppliers to get donations and sponsorships to reduce our costs as much as

possible, to be able to continue the cycle of building as partners pay off their homes. Most of the

materials costs can be donated either in cash or in kind through sponsorships. The labour cost is

defrayed to a huge extent by volunteers, but we still have to employ a nominee builder/project

manager to oversee the work and sign off to government requirements. As can be seen, land is

the biggest cost. We are working with other not for profit housing organisations to participate in

the Queensland State Governments GLASS Project whereby we can obtain land virtually for

free.

Australians are the richest people in the world!

The latest Credit Suisse world wealth report released last week showed that, like last year,

Australians are the richest people in the world. With a median wealth of US$219,500 per adult, we

sit comfortably ahead of Luxembourg on $182,768. The US, with a median adult wealth of only

$44,911, doesn't even make the top 25.

When counting by average wealth per adult, we drop to second behind Switzerland. Significantly,

however, Australia is more equitable than most wealthy nations. Of the top 50 biggest economies,

only Belgium, Italy and Finland have less of a difference between median and average wealth.

The greater the difference, the more wealth is in the hands of the richest.

Australia's average wealth is just 1.8 times our median wealth; by contrast the UK's is 2.2 times

greater, while the US is second worst out of the top 50, at 6.7 times. Russia is the most inequitable,

with its average wealth 12.6 times that of the median wealth.

So shall we break out the champers and order some extra-large lobsters for Christmas lunch this

year?

Well maybe ... but maybe not.

The Credit Suisse report is always a nice one for Australia. We certainly punch above our weight

when it comes to wealth. But a closer inspection reveals that part of our high national wealth is due

to the very measure used – US dollars.

The large appreciation in the value of Australia's currency in the past three years has meant that

converting Australian dollars into US currency sees Australia rather wealthier than we once were in

US dollars.

The average wealth of Australian adults is just over US$402,000, but if we measure it using a

constant exchange rate that negates the improvement in our currency in the past three years, the

average is only $328,900.

That we are this wealthy should not come as too much of a surprise. We have long been near the

top of charts when comparing GDP per capita using US dollars. Currently of the IMF's top 34

advanced nations only Luxembourg, Norway and Switzerland sit above Australia using that

measure.

But again if we look at the growth in Australia's GDP per capita, the big boost since 2009 occurs only

if you measure in US dollars. Using nominal Australian dollars our growth since 2007 has increased

by 24%, compared to 42% using American currency. If we account for inflation and look at the

growth in real terms – the measure often used to define increase in standard of living – Australia has

only increased by 5% since 2007.

So does this mean all this wealth is a fib?

Well, not really.

While a 5% increase in the standard of living since 2007 sounds pretty poor, in the context of the

world economy during that time Australia is well above average.

Of the 34 advanced economies, Australia has the 8th best growth. And when compared to the 6%

decline in the UK's living standard since 2007, 5% looks fairly impressive.

Moreover, even when accounting for a constant exchange rate, Australia has the third highest

average wealth in the world, behind Switzerland and Norway. So it is not all about the exchange

rate; the reality is, Australians are, in a global context, stinking rich.

How rich? Well, we are a mere 0.36% of the world's adult population but we account for 3.78% of the

world's top 1% wealthiest. The only nation with a more lopsided share of the top 1% is Switzerland,

whose 0.13% of the world's population still sees them with 1.63% of the richest 1%.

How did we earn such wealth? Mostly it has come about through home ownership. Credit Suisse

notes that our wealth is "heavily skewed towards real assets", which amount on average to

US$294,100 or about 59% of total assets. This average level of real assets is second only to

Norway.

It suggests a situation open to risks of inequality, as those on poorer incomes are shut out of the

wealth-generating housing market, and a danger that our wealth could collapse if house prices fall.

When the American housing market collapsed in 2007-08, its average wealth fell such that it took

five years to get back to 2007 levels. And with only about 32% of American wealth in non-financial

assets, it is much less exposed to the housing market than Australia.

At this point the question turns to how well this wealth is spread around Australia. As we noted in

August inequality in the first part of this century increased significantly, but the GFC actually reduced

inequality. ANU professor Peter Whiteford notes this came about through the increase in the pension

in 2009 and also because the incomes of higher earners did not increase by as much.

But one group left out were those on Newstart. Since the mid-1990s Newstart has gone from just

below 50% of the median household income to now around 30% – well below poverty level.

The Credit Suisse report should give Australians some sense of pride at how their country

weathered the great recession. But while most of our issues are decidedly "first world problems", let

us not think that everyone is enjoying this great increase in wealth, and neither should we think it is

built on foundations that will never crack.

Bob Day: Current Australian house prices more than nine times median

household income

acebook

Modern residential homes Source: Getty Images

FOR more than 100 years the average Australian family was able to buy its first

home on one wage. The median house price was around three times the median

income, allowing young homebuyers easy entry into the housing market.

As can be seen from the accompanying graph, the median house price is now - in real

terms that is - relative to income, more than nine times what it was between 1900 and

2000.

At nine times median household income a family will fork out approximately $600,000

more on mortgage payments than they would have had house prices remained at three

times the median income.

That's $600,000 they are not able to spend on other things - clothes, cars, furniture,

appliances, travel, movies, restaurants, the theatre, children's education, charities and

many other discretionary purchase options.

The economic consequences of this change have been devastating. The capital

structure of our economy has been distorted to the tune of hundreds of billions of

dollars, and for those on middle and low incomes the prospect of ever becoming

homeowners has now all but vanished.

Housing starts have plummeted and so have all the jobs associated with it - civil

construction, house construction, transport, appliances, soft furnishings, you name it.

Not to mention billions of dollars in lost GST revenue to the various states.

And while the slump in business conditions over the past years have been blamed on

everything from the GFC to the high Australian dollar, the real culprit has been the

massive redirection of capital into high mortgages.

Looking to the Reserve Bank to fix the problem through monetary policy (ie, lowering

interest rates), isn't going to work.

The distortion in the housing market, this misallocation of resources resulting from the

supply-demand imbalance, is enormous by any measure and affects every other area of

the economy. New homeowners pay a much higher percentage of their income on

house payments than they should. Similarly, renters are paying increased rental costs

reflective of the higher capital and financing costs in turn paid by landlords.

The economic consequences of all that has happened over these past few years have

been as profound as they have been damaging. The housing industry has been

decimated, as have industries supplying that sector.

The capital structure of our economy has been distorted and getting it back into

alignment is going to take some time. But it is a realignment that is necessary. A terrible

mistake was made and it needs to be corrected.

Bob Day AO is managing director of Homestead Homes and is Federal chairman

of Family First.

Here’s what I think you need to take into consideration when calculating a comfortable family

income for you and your family. You might be able to think of many more.

Cost of mortgage or rent.

Cost of running a car or cars.

Cost of food for your family.

Cost of utilities; electricity, gas, water and rates.

Cost of additional shopping items; clothes, gadgets, health and beauty, jewellery, computers and

toys.

Cost of insurances, for the home and for private medical insurance.

Cost of telephones, both home and mobile.

Cost of entertainment items, like holidays, alcohol, digital TV, going out.

Cost of unexpected maintenance bills, for your home, for your car and other things that break.

Construction Cost Table

Construction Type

House Level of Finish Low Medium High

3br brick veneer project home, level block, single level, shelf design

$1,065 $1,270 $1,630

3br full brick project home, level block, single level, shelf design

$1,090 $1,305 $1,670

4br brick veneer home, level block, single level, unique design

$1,570 $1,750 $1,950

4br full brick home, level block, single level, unique design

$1,640 $1,810 $2,010

3br brick veneer project home, level block, two level, shelf design

$1,110 $1,310 $1,710

3br full brick project home, level block, two level, shelf design

$1,130 $1,400 $1,790

4br brick veneer home, level block, two level, unique design

$1,700 $1,900 $2,050

4br full brick home, level block, two level, unique design

$1,780 $1,970 $2,250

Architecturally designed executive residence

$2,160 $3,250 $5,050

Townhouse

2br, single level brick veneer townhouse, including allowance for common property

$1,250 $1,490 $1,740

2br, 2 level brick veneer townhouse, including allowance for common property

$1,350 $1,580 $1,900

3br, single level brick veneer townhouse, including allowance for common property

$1,235 $1,475 $1,725

3br, 2 level brick veneer townhouse, including allowance for common property

$1,340 $1,610 $2,270

Units

3 level walk-up unit complex, concrete structure, ground floor parking

$1,650 $1,820 $2,320

3 level walk-up unit complex, concrete structure, basement parking

$1,615 $1,785 $2,285

4-8 level walk-up unit complex, concrete structure, ground floor parking

$1,720 $1,950 $2,650

4-8 level walk-up unit complex, concrete structure, basement parking

$1,650 $1,920 $2,615

8 or more level unit complex, including lift and basement car parking

$1,710 $2,280 $3,030

Commercial

1-4 level open plan offices, including A/C & lifts, excluding fit out

$1,480 $1,760 $2,290

4-8 level open plan offices, including A/C & lifts, excluding fit out

$1,620 $1,850 $2,400

8 levels and over, including A/C & lifts, excluding fit out

$1,880 $2,064 $2,770

Industrial

High Bay Warehouse, standard config, concrete floor, metal clad

$810 $885 $980

High Bay Warehouse, standard config, concrete floor, pre-cast concrete wall clad

$1,050 $1,110 $1,250

Retail

Suburban shopping mall area including A/C

$1,590 $1,810 $2,100

Supermarket, including A/C, excluding fit out

$1,380 $1,500 $1,670

Hotels/Motels

Single level boutique motel, including A/C, guest facilities

$2,650 $3,200 $4,500

Single level tavern/hotel, including A/C, excluding loose item fit out

$1,980 $2,350 $2,650

Regional Variations Cairns

115 % 130 %

Brisbane

105 % 115 %

Sydney

100 % 100 %

Canberra

96 % 104 %

Melbourne

98 % 108 %

Hobart

87 % 97 %

Adelaide

98 % 110 %

Perth

100 % 120 %

Darwin

110 % 120 %

If your development is not located in Sydney, you can still use these rates as a guide by applying a regional

variation percentage. Simply multiply the construction cost by the regional variations opposite. This will give

you an approximate cost for the construction type per square metre in your area.

The Calculation of Construction Costs

The above costs are calculated based on a Gross Floor Area (GFA) rate. Typically GFA can be

defined as the sum of the fully enclosed covered floor area and the unenclosed covered floor area of

a building at all floor levels, measured in a square metre rate. GFA consists of two elements:

FECA: Fully Enclosed Covered Area

UCA: Unenclosed Covered Area

FECA: Includes items such as:

Basements

Attics

Garages

Penthouses

Lift shafts

Staircases

Columns and piers

UCA: Includes items such as:

Roofed balconies

Open verandahs

Porches and porticos

Attached covered walkways

Usable space under buildings

Costs provided are an average price for typical buildings as at the date of publication, allowing for

preliminaries, builders profit and overheads. Costs can provide no more than a rough guide to the

probable cost of building, as costs can vary significantly based on site conditions, level of fit out and

design.

Disclaimer:

The construction cost information above is provided as a general guide to allow you to estimate the potential construction costs for a building

type. However, the Cost Information is based on assumptions concerning construction type, quality and condition of inclusions which may

differ from your personal circumstances. You acknowledge and agree you must undertake your own analysis and obtain independent

construction, legal, financial and taxation advice before using, relying or acting on the Cost Information.