Who is most affected by the cost of living increases?

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Who is most affected by the cost of living increases? The answer is dependent on how people choose to spend their money and where people are positioned in the Normal Distribution Curve. We accept that there are families, singles and couples and that they spend their money differently. However, there are similarities that create averages. The average ‘behaviours’ is where we see who is most impacted by the cost of living increases.

 

When we hear about the cost of living it is the average person(s) behaviours being reviewed. To make sense of the behaviours we graph the results and make predictions.  Economists love The Normal Distribution Curve – Bell Curve. The peak point represents the most probable event and the edges are less ‘average’. Simply, everyone left of the centre is more severely impacted by the cost of living and everyone right of the centre is less squeezed. There are many uses for the distribution curve and it helps to explain averages.

 

 

Real life example

 

 

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The height of people is an example of normal distribution. Most of the people in a specific population are of average height – the middle vertical line. The number of people taller and shorter than the average height people is almost equal, and a very small number of people are either extremely tall or extremely short. Several genetic and environmental factors influence height.

 

 

So how do ‘average people’ spend money?

 

 

The rising cost of living is particularly noticeable in non-discretionary spending – food, housing, and fuel. It is hard to cut back on non-discretionary spending and The ABS reported annual inflation in non-discretionary spending was almost twice that of discretionary spending in June 2022 – Figure 5.

 

 

 

People are increasingly finding it difficult to fund expenses by cutting back on things like fuel, food and housing. Instead, discretionary spending is likely to shrink more and that is impacting the entire economy.

 

 

How does the cost of living impact the real estate market?

 

 

Many commentators report eminent house price drops but people are not white-knuckling this period to throw their properties on the market at what they perceive as a loss. In fact, there have been reported increases because there is a low supply. Quality, high-demand property in Australia is an investment in the now and long term. The characteristics that make properties sought-after are very seldomly impacted.

 

 

Just like the doom real estate predictions during covid never eventuated the cost of living and a high-interest rate environment is not what will drop housing prices. Property sales activity also follows that distribution curve. The average properties are often the most desired so demand has been more stable and less volatile.

 

The lesser desirable and most expensive have less demand so those properties tend to linger on the market. The only ‘bargains’ will be the properties that have negative equity. However, many of those are not in high-demand suburbs. The fundamentals are constant and those that have invested in property and did not overstretch are probably the least affected by the cost of living rises – no matter how bad the economic pain feels.