Saturday, June 30, 2012

Poor getting wealthier faster than the rich

There’s not much justice in the world, but there is a bit: according to a researcher at the Reserve Bank, the poor have been getting wealthy faster than the wealthy have been in recent years.

If you find that hard to believe, I don’t blame you. It’s not a conclusion you come to from looking at the Bureau of Statistics’ survey of the distribution of wealth. Rather, it comes from Richard Finlay’s decomposition of the wealth figures included in HILDA - the survey of household, income and labour dynamics in Australia.

But let’s start at the beginning. In Australia, as in all countries, the distribution of disposable income (wages and other earnings, plus welfare benefits, less income tax) between households is quite unequal. And here, as well as in other countries, the distribution of wealth (household assets less liabilities) is even more unequal.

According to the bureau’s figures for 2009-10, the best-off 20 per cent (‘quintile’) of households had 40 per cent of all the income, but 62 per cent of all the wealth. By contrast, the worst-off quintile had 7 per cent of the income, but just 1 per cent of the wealth.

Why the disparity between income and wealth? Partly because some forms of wealth (such as owning your own home) don’t generate explicit flows of income. But also because governments focus most of their efforts on redistributing income rather than wealth between rich and poor, using the tax and transfer (welfare benefits) system.

The poorest 20 per cent of households have some income because the government pays them a pension or the dole to make sure they don’t starve. They have no wealth primarily because they don’t own the home they live in.

So there’s no great mystery to wealth. The main way to acquire it is to buy a home and pay it off. The next most common way is to have a job and be compelled to put 9 per cent of your wage into superannuation saving. Then comes buying a weekender or an investment property.

Most people would have some money in the bank; some people have a lot. About a third of households own shares (directly, not just via super) and some own businesses. It’s mainly these latter that distinguish the really rich.

You’d expect the people with the highest incomes to have to most wealth, but it’s not that simple. People who own their home outright tend to be richer than people with a mortgage and people with a mortgage tend to be richer than people who rent.

As well, older people tend to be richer than younger people because they’ve had longer to save (and benefit from capital gain). Of course, once people retire they inevitably (and sensibly) run down their savings.

Naturally, the value of people’s assets has to be weighed against their liabilities. Few people acquire property without also acquiring debt, and property debt accounts for 80 per cent of all household liabilities. We worry about our credit card debt, but it pales compared with property debt, which divides 70/30 between the principal home and weekenders and investment properties.

It’s much more the rich than the poor who have debts. These days you borrow to make money and, in any case, banks are reluctant to lend to the poor. That’s particularly true of people borrowing for negatively geared property or share investments.

The top income quintile accounts for almost half the total household debt, while the top two quintiles account for more than 70 per cent.

When people see that household debt now accounts for about 150 per cent of annual household disposable income, they think of young couples getting in over their heads to buy their first home. There are some of them, of course, but for the most part the people with the most debt are those with the greatest ability to service it.

Finlay’s article in the Reserve Bank Bulletin says the real (inflation-adjusted) wealth per household was relatively flat from the late 1980s to about 1996. But then it started to increase, driven by the rising prices of property and shares. Over the following decade it grew at the real rate of 6 per cent a year.

But in 2008, ‘with the onset of the global financial crisis, household wealth fell substantially as the prices of dwellings and financial assets fell,’ he says. Wealth recovered somewhat in 2009 and 2010, but since then (and not covered in our figures, which are for 2010) house and share prices have been, as they say in the market, ‘flat to down’.

Over the four years to 2010, mean real wealth per household grew at the rate of just 1 per cent a year. But here’s a trick: whereas the mean (arithmetic average) wealth per household was almost $700,000, the median (middle) wealth was about $400,000.

It’s actually common for the mean to be a lot higher than the median in the case of income or wealth. That’s because a relatively small number of individuals or households are so much better off they push up the mean, thus making the median a better measure of the ‘typical’ household.

Another way to put it is that the distribution of wealth is ‘skewed’ in favour of people at the top. But Finlay finds the degree of skewness seems to have fallen over the past four years.

Using the median rather than the mean to characterise each quintile (which I suspect explains why his findings differ from the bureau’s), he finds that median real wealth in the lowest quintile grew by 5 per cent a year over the period, whereas the medians for the three middle quintiles grew by about 2 per cent a year and for the wealthiest quintile by less than 1 per cent a year.

Why? Partly because of a low-base effect: the less you’ve got to start with, the easier it is to have a larger percentage increase.

But also because richer households tend to hold a higher proportion of their wealth in riskier forms, such as shares. So they would have suffered bigger losses during the financial crisis and maybe smaller gains since then.

Richer households are more likely to have taken on negatively geared property and share investments. The crisis wouldn’t have been kind to them. As well, the very highest house prices tend to be more volatile than other home prices.

There’s just a bit of justice in the world.