Middle-class poverty has become more commonplace following the disruptive economic flow-on effects from the COVID-19 global pandemic which lasted from January 2020 until May 2023. During this period, many middle-income families and individuals began to slide into relative poverty for the first time in their lives. This trend extended across much of the Western world.  

A study by Pew Research Center found that the global middle class reduced by 54 million people in 2020. In the same timeframe, the number of people living in chronic poverty increased by 31 million worldwide. Reasons for this are varied but not unexpected.

Extended lockdowns and supply chain shortages killed small businesses within months. Hospitality staff and those employed in public-facing service industries lost shifts and eventually their jobs because of small business failures and lockdowns. Many people were forced onto welfare for the first time in their lives. Some found themselves living near to or below the poverty line – particularly students, older, more vulnerable workers, and those supporting families.

Middle-class poverty arose directly in relation to rising inflation and the higher temporary unemployment caused by the pandemic. On May 5, 2022 the World Health Organization declared the COVID-19 pandemic and associated Public Health Emergency to be over. Despite this, the economic conditions created by it persist – particularly continuing high inflation although employment levels globally remain tight.

What is middle-class poverty?

Poverty refers to a situation where the basic needs of a family or individual for things like food, shelter, clothing and education are unable to be met. When poverty becomes chronic it becomes impossible to escape from. This is more likely if there’s no functional welfare system in place to help struggling people meet these basic needs.

Middle-class poverty is a more specific subset of the definition of poverty. It’s also known as relative poverty or hidden poverty. Middle-class poverty refers to a scenario where individuals or families who are considered middle class – in terms of income and lifestyle – find themselves struggling to meet their basic needs and maintain a reasonable standard of living. 

In Australia, this might look like a professional couple, working full or part-time with at least one income earner making six figures annually. Despite a significant combined income, this family still needs to visit community food banks to feed their families – periodically. This occurs because the bulk of one person’s income is simply servicing the mortgage or paying the rent – with no savings buffer. As families struggle to meet these rising basic living costs, they become more vulnerable to further financial shocks in the future. To manage this, many working families report at least one income earner – working multiple jobs to remain afloat.

Rising mortgage repayments and rents

To make matters worse, real estate values in Australia are out of control and have been for decades. This affects both renters and homeowners equally. But homeowners are currently being hit harder after 12 cash rate rises (during and post-pandemic from May 2022 to present) pushing up their mortgage repayments. 

In the following table compiled by Rate City sets out in real terms how mortgage repayments have increased in line with rises in the Reserve Bank’s cash rate. This data is based on a $500,000 owner-occupier home loan paying both principal and interest with a 25 year term remaining. This data assumes that the banks would pass on the cash rate increase in full. Which of course they did.

Table showing cash rate effects on mortgage repayment increases

Starting monthEstimated repaymentDifferenceIncrease from April 2022 by
April 2022$2,335NilNil
May 2022$2,400$652%
June 2022$2,532$1978%
July 2022$2,667$33314%
August 2022$2,807$47220%
September 2022$2,949$61426%
October 2022$3,022$68729%
November 2022$3,095$76033%
December 2022$3,169$83436%
February 2023$3,243$90839%
March 2023$3,318$98342%
May 2023$3,393$1,05845%
June 2023$3,469$1,13449%
Mortgage repayments rising in line with the RBA cash rate

So you can see from the data above, some homeowners have seen their mortgage repayments rise by as much as $1,000 per month from May 2022 to present. (January is unreported as the RBA didn’t raise the cash rate that month). These rate rises are determined not only by interest rates rising but also the size of each mortgage. In Australia, the average mortgage can range from $400,000 to over a million dollars. 

Overpriced real estate driving middle-class poverty

For the average Australian family seeking to buy a home – the cost is now approximately $1 million in most capital cities. The Australian Bureau of Statistics cites the average cost of a home in Australia’s most populous state – New South Wales to be $1,150,400. This is the highest in the nation. House prices in the Australian Capital Territory come a close second costing on average $951,800. To buy a house in the southern state of Victoria will set you back at least $898,300. And the cheapest place to buy your own home in Australia is the Northern Territory at an average price of $502,100.

To give you an example of what middle-class poverty looks like in Australia, consider the following headline from Nine News – “Aussie families left with just $73 a week as cost of living crisis grows”. This article reports that a full-time worker on the minimum wage of $23.23 per hour (or $882 per week) will only have $57 leftover after paying for rent, food and weekly expenses.

The figures were based on data from Anglicare Australia’s Living Costs Index. The Anglicare index helpfully sheds further light on the financial situation of approximately 2.75 million Australians and their families.

The largest financial outlay in Australia is usually rent or mortgage repayments. Average house rent in Australia ranges from $530 in Tasmania up to $700 in Sydney – per week shown in the graph below:

Median house rents – June 2023 

CityMedian House RentAnnual change
Melbourne $520+13.0%
All capital cities$580+11.5%
Median house rents – June 2023 – Source – Domain

If you average this data across all capital cities, this produces a national average of $580 per week to rent a house or apartment. This figure is, for many single income earners, more than 30% of their weekly income. Sometimes more. Welfare recipients are priced out of the residential housing market in most cases. Those on Centrelink often rely on cheaper community housing – of which there is also a shortfall – and long waiting lists.

Australia is in the midst of a severe housing crisis which has worsened over the past five years. A 2021 report from the Grattan Institute found that there were approximately 400 dwellings for every 1,000 people. This is one of the lowest supply rates in the developed world.

Presently there are major shortages of places to live across all capital cities and many regional areas. This means that, in many cases, potential tenants must bid well above the advertised rental prices in order to secure a home. This is despite there being prohibitions on rent bidding in some states. This is all complicated further by a complete lack of harmonisation across the states and territories around tenancy laws.

middle-class poverty in rent bidding
Long queues of rental applicants at open homes

It’s now common to hear of educated professionals earning over six figures with strong employment histories struggling to secure an appropriate rental property in many Australian cities. Some Australians are adapting by living in portable accommodations – including tents and caravans or couch surfing – until they find a suitable rental home.

Inflation, monetary policy and the cash rate

The Reserve Bank of Australia has raised interest rates 12 times since the beginning of the pandemic. They did this by raising the cash rate.

The cash rate is the interest rate set by the Reserve Bank of Australia on overnight loans between commercial banks. In Australia, this is generally the Big Four Banks. The Big Four are the Commonwealth Bank, Westpac, National Australia Bank (NAB) and the Australia and New Zealand Banking Group (ANZ). The cash rate applies to all commercial banks operating in Australia. This includes smaller banks, credit unions and building societies. When the Reserve Bank increases the cash rate, the banks will usually pass on that interest rate to their customers – who are both mortgage holders or lenders. 

As the cost of holding a mortgage rises, this can indirectly affect the supply and price of housing in Australia.  

How the cash rates works

Returning to the cash rate and to provide some historical context, consider the following. In Australia the cash rate has varied from a high of 17% in the 1990s to lows of 0.25% in April 2020. At the time of writing in August 2023, the cash rate sits at 4.10%. 

This cash rate drives mortgage home loan interest rates offered by the Big Four banks in Australia. So, even if the cash rate is 4.10% – the bank will pass on a higher rate to the customer. Currently, Westpac charges between 7% to 8% for variable home loans for new mortgages in August 2023. The other three big banks presumably offer similar rates. Borrowers have to shop around to find the most competitive rates to keep their living costs low. 

However, many families must either refinance their homes, get second jobs as well as drastically cut their spending just to keep a roof over their heads. There may also be bank foreclosures on mortgages where families are unable to meet their repayments. This happened in the United States extensively in the 2008 subprime mortgage crisis.

However, the unregulated nature of the US subprime markets meant that the housing bubble and subsequent market collapse were far more catastrophic than is likely to occur in Australia. Australia’s stronger regulatory framework and continuing housing shortage may also cushion any likely impact.

Notwithstanding the above, the Reserve Bank’s Graph of the Cash Rate Target shows just how drastically this arm of monetary policy has been used to reduce inflation – without much success.

Middle class poverty affected by cash rate

Source: RBA

How is the cost-of-living crisis affecting Australians?

Current data shows that poverty is now affecting over 3.3 million Australians – out of a total population of 25.7 million. That’s almost 8 percent of Australians living in poverty. That data includes more than 700,000 children. The data also shows that 40 percent of renters anticipate struggling to pay their rent in the next quarter. 

Suicide Prevention data from March 2023 indicated that 46% of Australians are experiencing significant financial hardships impacting their mental health. Australians experienced mental distress from housing affordability (23%), unemployment (21%), cost of living pressures and personal debt. Other factors included housing access and affordability and job security. Flow-on effects included social isolation and relationship breakdowns – which are far more likely to appear during times of financial instability.

The June Quarter CPI data from the Australian Bureau of Statistics provides a snapshot of rising prices across Australia currently. Food prices and essential costs remain high despite the best efforts of the Reserve Bank to dampen consumer spending via increasing the cash rate.

Unsurprisingly, many Australians are reporting financial stress in meeting existing grocery, energy bills and fuel costs which have risen substantially over the past year. More than half of Australians surveyed report feeling anxious about their ability to meet essential expenses in the next three months. 

What does middle-class poverty look like in real terms?

Examples of middle-class poverty may include the following:

  • Reduced access to essential services. Families struggling to afford quality healthcare, education, childcare, housing, and other basic necessities. For example, struggling families may decide to forgo spending money on private health insurance or private education for their children.
  • Greater debt levels. Families forced to borrow money to meet unanticipated expenses. Higher housing, food and transport costs forced many Australians to turn to unsecured debt options such as Afterpay. This was often just to manage day-to-day payments. This pushed many into unsustainable debt levels over the longer term.
  • Erosion of savings and assets. Rising costs means that many individuals and families are digging into their savings or selling prized possessions just to cover daily expenses. This makes them more vulnerable to further economic challenges and unforeseen events. It also has a significant negative impact on psychological well-being.
  • Limited social mobility. This can include being unable to satisfactorily invest in education, skill development, and career advancement due to financial constraints. This results in flow-on effects affecting diminished upward mobility and longer term wealth building.
  • Reduced discretionary spending. This means less spending by consumers on luxury items and non-essential purchases. Examples include luxury goods, new vehicles, gym memberships, school sport, family vacations and so on. Discretionary spending on entertainment including dining out and streaming services (such as Netflix, Amazon Prime, Stan) may also be reduced.
  • Holding multiple jobs. For example, a husband working in a supermarket during the day and driving for Uber on weekends. Many university students have reported working two or even three jobs – made possible in this tight employment market.

It’s important to note that middle-class poverty is a complex and nuanced concept. Your experience of middle-class poverty will vary based on factors such as location, cost of living and social support systems. Individual circumstances and personal resilience also play a part. It also boils down to how an individual or family might perceive their own financial stability and how they can influence this.

Rising inequality – a global trend

So while the Pew Research Center noticed that the global middle class decreased by 54 million people in 2020. It also found that the number of people living in chronic poverty increased to 131 million during this same period. The flipside is the biggest surge in billionaire wealth ever seen in history.

From March 2020 to present, the world’s ten richest entrepreneurs doubled their fortunes from $700 billion to $1.5 trillion. At the same time more than 160 million people globally were forced into poverty according to Oxfam.

Facebook, Amazon, Netflix, Microsoft, Zoom, Shopify, Microsoft and many other giants reported massive profits from March 2020 to the present. In this same period, Forbes reported that an additional 493 people became billionaires in various parts of the world. Oxfam explains this in the following terms:

The world’s small elite of 2,755 billionaires has seen their fortunes grow more during Covid-19 than they have in the whole of the last fourteen years combined. This is the biggest annual increase since records began. It’s taking place on every continent. It’s enabled by skyrocketing stock market prices, a boom in unregulated entities, a surge in monopoly power and privatization, alongside the erosion of individual corporate tax rates and workers’ rights and wages. Since the pandemic began, a new billionaire has been created every 26 hours.

Source: Oxfam

This provides a stark contrast to the millions who struggled financially to stay afloat. The economic effects of the pandemic created a perfect storm for the significant erosion of the middle class as well as pushing many into chronic poverty where they will remain. Meanwhile, the rich one percent magnified their wealth excessively.