Minimum wage nowhere near keeping pace with rents

October 31, 2019

This month’s 3 percent boost to the minimum wage may have outpaced inflation, but skyrocketing rental prices have left workers struggling to put roofs over their heads.

Anglicare executive director Kasy Chambers said that the Fair Work Commission’s (FWC) lift to wages was “more than it could have been, but not enough” to meet increasingly expensive housing costs.

Last year, the FWC opted to increase the minimum wage by 3.5 percent, and this year cited the “drop-in inflation” – measured by the Consumer Price Index (CPI) – for this year’s smaller increase.

While the FWC does look at other measures too, the use of CPI presents a problem because it doesn’t fully reflect the costs associated with private rentals, Ms Chambers said.

“The consumer price index is based on a basket of goods, but it doesn’t include rent or housing costs,” she said.

“It’s all well and good to say these increases should be around inflation, but rents have actually shot up way more than that.

“Housing costs have gone up by 300 per cent since 1998, which is about five times faster than CPI which has increased by 63 percent over the same period.”

A table showing housing cost growth and CPI.
Housing costs have outpaced CPI. Source: Commonwealth Bank Global Markets research

However, there are several “good and predictable reasons” why these housing costs aren’t reflected in CPI figures, according to ABS chief economist Bruce Hockman. Put simply, that’s not what the CPI figures are supposed to measure.

The methodology for measuring CPI does include some housing market costs, such as the cost of purchasing a new house, and Mr Hockman added that rents are also included despite Ms Chambers’ concerns.

But it excludes things like land prices and mortgage interest charges because those pieces of information don’t fit the purpose of the CPI data, and in some cases would skew the results.

For example, the cost of land varies from neighborhood to neighborhood, even though the cost of building a house doesn’t change based on how much the owners paid for their plot (assuming the house being built is identical, regardless of neighborhood).

Land costs are therefore more akin to an investment expense than a consumable expense, which means it sits outside the CPI’s remit. There are, however, other data sets that look into these costs, Mr Hockman said. It’s just a matter of using the right one.

“They’re asking different questions, and finding the CPI isn’t answering the questions they’re asking,” he said.

A separate ABS data set, Housing Occupancy and Costs, Australia, 2015-16, showed that the number of lower-income households spending more than 30 percent of their income on housing costs grew from 35.4 percent in the 2007-08 financial year to 44.2 percent in 2015-16.

Community housing different

Another factor that needs to be considered when assessing how minimum-wage earners are affected by rental price increases is the role of community housing.

Mr Hockman said many minimum-wage earners could be living in community housing, and given that the costs associated with community housing programs are linked to incomes, any increases will be proportionate to the increase in the minimum wage – meaning it won’t become drastically more costly for those affected.

However, Ms. Chambers said in reality public housing is also doing little to assist the growing affordability gap, as people earning the minimum wage are becoming less likely to have access to these services.

“Public housing is now very much for people who are on benefits or have specific needs, and we have a decreasing amount of public housing, so the private rental market is meant to answer the needs of people on low to middle incomes,” she said.

“What we’re seeing through our rental affordability snapshots is that it simply doesn’t meet those needs.”