How much the cost of living crunch has cost you – and what you have cut out

Households have an average of $10,700 less per year to spend on non-essentials such as eating out, holidays and entertainment after the worst cost of living crunch in decades as those with mortgages were left short by more than twice that amount.

New economic analysis has put a dollar figure on how two years of high inflation and rising interest rates have sapped discretionary spending, and how different household types have been affected.

Kitchen-table challenge: home borrower Mac Karnecki is “always looking out for bargains” amid cost of living pressures.Credit: SMH

Those with a mortgage are the hardest hit; that group has had an average of $21,300 a year slashed from non-essential spending compared with 2020, the study by economic consultancy Polis Partners shows.

Renters have an average of $13,300 less a year to spend on non-essentials compared with 2020; that group has also missed out on strong capital growth in housing since the pandemic.

The least affected have been those who own their home outright; that group makes up around 30 per cent of households and has an average of $7200 less for non-essentials compared with 2020.

Polis Partners economist and report author Rob Tyson said a financial “sugar hit” experienced by households due to generous income support and near zero interest rates during pandemic disruptions in 2020 had given way to a sustained deterioration in spending power.

“This cost of living squeeze has been the steepest and most prolonged period of deteriorating household finances since the start of the time series in the early 2000s,” he said.

Mac Karnecki and Stephanie Quirk borrowed to buy their first home at Mount Warrigal near Wollongong in late 2022 after “scrimping it” for several years to save a deposit.

Five interest rate hikes since that purchase, coupled with high inflation, means Karnecki is now “always looking out for bargains and cheaper ways to buy stuff”.

The couple and their three children have sacrificed holidays, forgone new clothes, reduced meat consumption and let gym memberships lapse to reduce costs. A plan to buy a second car “just hasn’t happened”.

Karnecki, a fire protection system designer, aims for “as close to zero waste as possible” from the family food shop to help with savings.

“We used to get a coffee every day, but that’s gone, now we might buy a coffee once a week as a treat,” he said.

Quirk, who is an art teacher, recently asked Karnecki on a date. “We had a steak at home then I read him a book,” she said with a laugh. “I have to say it was good, and it was cheap.”

But the persistent cost of living pressure can be taxing.

“I’m often like, oh my God, should I really order that? Should I order this instead?” said Quirk. “It’s stressful.”

Aaron Christie-David, from Atelier Wealth mortgage brokers, said home borrowers have found many ways to make their incomes “stretch further” amid the cost of living squeeze. This includes taking shorter, less-expensive holidays, dining out less often, reducing children’s extracurricular activities, using fewer services like dry cleaning and selling the second car.

“People have had to adjust their lifestyles to put as many dollars back in their bank accounts as possible,” he says.

Analysis of spending patterns across the economy shows consumers have reduced purchases of many non-essentials including new furniture, electronics and fashion. Some households have lowered insurance cover to save money.

“Discretionary spending has pulled back broadly over the past three to six months as people ensure they can make ends meet,” said ANZ economist Blair Chapman.

The rate of inflation, which peaked at around 8 per cent in late 2022, has now been elevated for two years and, for much of that time, wages growth lagged price growth.

The Reserve Bank hiked interest rates 13 times between May 2022 and November 2023, lifting the official cash rate from near zero to a 12-year high of 4.35 per cent – where it remains. Some analysts believe interest rates could rise again this year following higher-than-expected inflation figures for the March quarter, released last week.

Low-income families have been hit especially hard by the cost of living crunch. The Polis Partners report has found that among households with the lowest 20 per cent of incomes, essential spending (on things such as groceries and utilities) outstripped total earnings by an average of $75 a week in December.

“This deficit means households are forgoing essential items, falling behind on bills, going into debt or resorting to other means such as relying on friends or families,” Tyson said.

The average amount of discretionary funds available to households peaked at $951 a week in mid-2020, but slumped to $681 a week by mid-2023.

Tyson said the speed at which disposable income declined during the past two years has affected the way consumers feel about their finances.

“Many people came off a time during COVID where they had the most cash they’ve ever had,” he said. “I think that may have heightened how people perceive the current crunch – there’s a real sense that just a couple of years ago, they were a lot better off.”

The amount available for discretionary spending improved modestly in late 2023, but Tyson warned “major reprieves for households appear some way off.”

The Polis partners report combines Bureau of Statistics data on income, expenditure and prices to track how much, on average, Australian households have remaining for non-essential purchases such as eating out, entertainment, holidaying, furniture, electronics, gym memberships, saving or investing.

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