Cost-of-living pressures dominate political debate, but the sharpest strain is not falling incomes. It is housing costs, particularly for first-home buyers, fuelled by stagnant productivity and chronic undersupply where people want to live.

The cost of living is clearly the number one issue in today’s politics. The 2025 Australian Election Study found that 36 per cent of voters mentioned this as their most important election issue.

Furthermore, the study found: “It is rare for a single issue, particularly one that is relatively new, to dominate an election. This illustrates the level of concern cost of living pressures have generated for voters.”

But the critical question, that has been largely ignored, is how severe are these cost of living pressures and what can be done to change them?

The obvious test of cost of living pressures is to examine what has been the recent history of living standards.

Certainly, according to ABS data, the average real ordinary time earnings of a full-time adult male are still a little lower than they were pre-Covid in May 2019, although since Covid real earnings have started to slowly recover.

But an equally significant indicator of living standards is what has been happening to real household disposable income per capita. This is a broader indicator of living standards as it takes account of any other sources of income apart from wages, including government income support and any income tax paid.

According to the ABS data real household disposable income per capita has increased over the last six years since the advent of the Covid pandemic at an average annual rate of 0.6 per cent. While an even broader measure – the “adjusted disposable income” – which takes account of government assistance to households in kind has increased at an average annual rate of 1.1 per cent since 2019, before the pandemic.

Of course, the composition of income varies among different households, but on the evidence available, for many households – and especially those on welfare – it is not obvious that the cost of living has led to a fall in living standards. At most we can say that living standards have been fairly stagnant, and certainly not rising as much as before Covid, and even less rapidly than was the norm before the Global Financial Crisis back in 2008.

My suspicion is that where there is severe pressure on living standards, it is affecting those couples who are servicing a relatively new mortgage for their first home.

The ratio of the median dwelling price to the median household income in Sydney has increased from just over six in 2001 to almost 10 in 2024. And while these ratios are a bit lower in other state capitals, the rate of increase has been about the same in most of them.

This increase in dwelling prices must mean that first home-owners are being forced to take out much bigger mortgages relative to their income, and then servicing these larger loans puts significant additional pressure on their cost of living.

Essentially the key determinant of a nation’s living standards is it productivity. If productivity growth is stagnant, then living standards will also be stagnant.

It is not surprising, therefore, that the government and much of the commentary is focused on trying to improve productivity. But frankly, while most of the reforms proposed are worthy, it is questionable how much difference they will make to national productivity.

Instead, the reality is that through history productivity has been driven by new technologies, such as the wheel, steam power, electricity, and modern communications. Also, today these new technologies spread fairly quickly among the various countries that are at a similar stage of development.

Consequently, productivity growth tends to be about the same in all the developed countries. Indeed, as shown below, what is most noteworthy about productivity growth is how similar the experience of all the developed countries has been.

Table 1 Average annual productivity growth rates (per cent)

Source: OECD database

Much of the commentary makes it sound like Australia is unique in having a productivity problem. The implication is that there are reforms which Australia could adopt that would significantly lift its productivity performance and living standards.

But the evidence is that since the Global Financial Crisis (GFC) productivity growth has been lower in all the developed OECD economies than its rate of growth prior to the GFC. In addition, the US, Denmark and Switzerland are the only countries where productivity growth has been significantly higher since 2019 than it was in the previous nine years, while in most countries productivity growth has deteriorated further in the most recent period.

Given this common international experience of lower productivity growth, it must be questioned whether there are institutional and legal reforms that any one country can adopt that will make much difference to its productivity growth rate. Instead, technological innovation is what has mainly driven productivity growth, and it is by embracing new technologies that we are most likely to raise living standards in future.

Indeed, the US technical leadership in AI is the obvious reason why it has been a partial exception and lifted its most recent productivity performance. In that case the rest of us can hope to do better some time in the years ahead. But in the meantime, maybe we will need to adjust to more stagnant living standards.

However, in Australia’s case there is one other exception and that is access to housing. The rise in dwelling prices relative to incomes is a unique Australian problem. As a result, for new home-owners servicing their mortgage is typically their biggest household expense which can easily eat up more than thirty percent of income.

But we do know the answer to this unique Australian housing problem.

The fact is that Australian population growth has been no faster in the last six years than previously over the last several decades, so the pressure of demand for new dwellings is no higher than we were readily able to accommodate in the past. Instead, expert opinion is generally agreed that our problem is the supply side, and particularly the lack of dwellings where people want to live.

We know the answer lies in an increase in density in the inner and middle suburbs of our major cities. With time this would make a major difference to the cost of living for young people who are first homeowners and who have been most affected by cost of living pressures.