Australia’s middle class is shrinking, and it’s happening faster than most realise. Inflation, skyrocketing property prices, and rising interest rates are creating a wider economic divide. In this article, we break down the complex dynamics at play and explore how to protect your financial future in these challenging times.
What's playing out in Australia is the death of the middle class, and what I'm going to do in this article is explain what that means and why it is actually so important.
The factors that are unfolding over the next couple of years could mean the difference between you being able to retire or having to work well into your 70s, 80s, or potentially even later.
If you're interested in my thoughts, then definitely keep reading.
Australia’s Death of Middle Class Explained
Now, the death of the middle class—this is probably something you've seen plastered everywhere every so often. Every couple of years, the media headlines love it.
Today, we're going to break it down in an Australian context, because, to be honest, I haven't really found too much information specific to Australia. So, I took some time to do research and break it all down in a concise article for you to understand how things are playing out here.
Yes, on the surface level, we can say: Oh, property prices are going up in value—that's great, or We've got a rental crisis—how did that happen?
We can also say: We have inflation as well—ah, screw that! or Interest rates are going up—but I thought they were going down?
All of this is surface level.
What’s really playing out has been happening for years and years. Once you understand this concept, you'll realise why it's so important to start making those moves today.
It's not just about saying: Hey, I'm going to invest here, or I'm going to invest there.
It’s about having a plan.
When I was going through this as part of my research, looking at all of this stuff, it was actually quite disappointing to see that people are still falling for the same old narratives year after year and just expecting things to be different.
Now, you might be someone watching and saying: Okay, well, I haven't made any changes in my life, or, I haven't made any financial decisions lately.
The truth is, you need to start getting on top of it ASAP. If we've understood anything over the last couple of years, it's that the pandemic accelerated this decline in the middle class and the living standards we actually have.
Once upon a time, we thought one million dollars was a lot in Australia, and now it just seems like every second property—if you could get it for a million dollars in Sydney—would actually be a dream now.
That concept really flicked a switch, which is why I created this article. I'm going to do my best to simplify it so that you're not going to get bored reading this.
Effectively, what you're looking at is the middle-income earners of Australia and the middle asset owners.
Now, we'll go through some stats shortly, but effectively, how you've got to think about this is by considering the top end, which is the higher-income earners—the ones who own the assets—and the lower-income earners, who don't own any assets. They're basically using their pay just to live.
What we're seeing is an increase in both of those groups.
With the higher-income earners, they're using the higher income to go and invest, and those investments then inflate in value. They use that wealth to build more in terms of their portfolio.
If you look at an example during the pandemic, people who already owned property suddenly, over a period of 18 months, saw their properties go up by 20%, 30%, or 40%.
They had a couple of options:
They took that money and bought more property, they put it into stocks or other investments; or
They sold one property and paid off the debt on the others, which meant their net worth continued to increase.
When you flip over to the low-income earners during this time, you've seen a shortage of housing, you've seen inflation go up, so basic needs and goods are going up in value but not necessarily their income.
They may be in jobs that require very basic skills that can be easily replaced, and that always puts a cap on how much their income can actually increase.
An example of this would be something like a checkout attendant. Now, I actually don't like that term, but someone that serves you at, say, Woolworths or Coles at a grocery store. Their job is to assist you in scanning your groceries and completing that transaction.
However, think about it: over the last 15 years, we've gone from having 30 checkout lanes to probably only having 10 checkout lanes, to then having five checkout lanes, to now maybe two lanes with actual people working there—the rest are automated and self-serve.
With that, what you're seeing is fewer jobs actually in demand and potentially a lot more people who can do the job.
When you then flip across to the higher-income earners, they might be business owners, they may provide a good or a service to the community (like small businesses), or they might be a C-level executive.
How many of those are in a company? Usually maybe five, maybe two, maybe three, but it's not the same as someone that's, you know, refilling shelves at a grocery store. (I keep going back to the grocery store because I've got to go grocery shopping after this, so don't mind me. Haha!)
Statistics
What I'm showing you here now is for the United States, but it's pretty much playing out all across the world.
This is the share of adults in the US middle class, and it has decreased considerably since 1971. It goes back to the same thing.
In 1971, you had 25% in the lower income, which is now 29%. The middle income has gone from 61% to 50%, and the upper income has increased from 14% to 21%, the Pew Research Center reported.
The reason I show you this is because when you think about the death of the middle class, you might assume everyone just became poor, so there are more lower-income earners now.
However, that's not true. The higher-income and lower-income groups are both taking away from the middle, and that's why we're seeing a greater divide between the rich and the poor.
This divide has never been wider in Australia.
So how exactly does this happen?
Well, we've already started addressing it, right?
You've got factors like inflation, where basic goods and services take up such a large portion of your income that there's not much left afterward for investing and growing your wealth.
The increase in housing costs here in Australia is pretty ridiculous at this point, and that's why everyone keeps making fun of it, calling it a house of cards, a housing bubble, and predicting it's all going to explode.
However, I'm going to show you a couple of things in this article that might have actually held you back because you thought: This is the year it's going to crash, and then it doesn't.
Suddenly, sitting on the sidelines means that every dollar you have gets flushed down the toilet by 7% to 10% because of inflation.
If you've got money sitting in the bank, inflation is eroding its value.
At the same time, assets are going up in value, so you're getting left behind on two fronts at double the speed. You're losing money by just saving it due to inflation, while the goods and services you need are costing more, and assets are getting further out of reach. This makes you feel like you're falling further behind.
Now, in Australia, the middle class is estimated to be about 60%, so it's a bit different from the United States, but again, that number is shrinking, and it's shrinking fast.
We're in a catch-22 situation. If you say: Well, okay, let's just pump in more income and increase wages for the lower-income earners, they could move from low income to middle class, right? This would increase the middle class, and everyone's happy.
However, what ends up happening is that the extra income provided through higher wages may come from higher-income earners or businesses, and they might decide: I don't actually need that many people, leading to job cuts. It's a fine balance between the demand and supply of employment.
We've seen unemployment at record lows, but what we're starting to see now is more job advertisements, and we're about to see a large influx of migrants come into the country.
A combination of these factors could mean that jobs that had two positions open but only one person available to fill them, which previously drove wages up, may now have five people applying for those same jobs.
As a result, salaries or expectations around wages could start to drop.
If wages drop, then a greater portion of your income goes toward basic expenses, including housing.
Now, when you look at Australia's world-leading debt-to-income ratio, it's pretty crazy. All you see this chart do is one thing—basically go up and to the right.
You'll see the exact same chart play out when it comes to how much people are using right now in terms of their income to pay for their rent.
With interest rates going higher, you're pretty much in a situation where your rents are increasing, or your mortgage repayments are increasing, so you're screwed either way.
The only people that don’t get affected by this are the ones that have no debt at all—they own their own home, and it’s amazing.
Now, where it gets really scary is when you start seeing reports like this:
Although this number looks like it’s increasing, when you compare this supply forecast to the federal budget population projections for New South Wales—most of which will land in Greater Sydney:
Clearly, we can see there will be more people and fewer properties, and when that’s the case, you’re going to see prices increase for properties as well as for the rents people pay.
New figures on the distribution of household income, spending, and wealth released by the ABS suggest that the top fifth of households increased their income by 130%, while the poorest fifth saw a 50% raise between 2003–2004 and 2017–2018.
With housing making up such a big part of our weekly budgets when it comes to renting or owning your own place with a mortgage, unless things change with interest rates or there’s an increase in construction, this problem will only get worse. That’s where we’ll start seeing the rapid decline of the middle class accelerate even faster.
When it comes to immigration, and we know we’ve had a big push here in Australia to bring more people into the country, these numbers are pretty scary.
Although we’re thinking: Okay, immigrants are coming, and they’re going to try and save their money because they don’t have much, 122,000 of those people are millionaires.
These immigrants are coming from everywhere—China, India, the UK, UAE, Singapore—and they like Australia.
I mean, who doesn’t like Australia?
However, where we’re headed, based on all the logic out there, is like jumping out of a plane with no parachute attached. There’s only one way this ends; it’s just a matter of when, not if.
That’s why it’s quite disappointing when I speak to people saying:
"I’m not going to invest.”
"This is a dumb time to invest."
It’s like—zoom out.
Think about what this means for you if you aren’t investing, and if you aren’t going to invest, have a plan for when you will invest, because the idea is to own assets.
Given the choice between assets and fiat currency, you should use the fiat to drive oil into the machine.
Once that machine grows, it will then produce whatever you want in terms of fiat currency, which you can then use to live your everyday life.
I hope you guys have found this article useful. The idea is to see what’s playing out over long-term trends here in Australia.
The death of the middle class is, unfortunately, happening. The rich will get richer, and the poor will get poorer.
I think the big divide between which group you fall into will depend on how you go about acquiring assets and building a portfolio for yourself. Financial education is important; it gatekeeps a lot.
Hope you guys have learned so much from me in this article. I’ll catch you guys in the next one. Thanks, guys!
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