Great Aussie Pipedream: rising house prices make us feel wealthier

I guess you’ve heard. Isn’t it great? Australians are now the richest people in the world. But if you find that hard to believe, congratulations. Your bulldust detector’s working fine.

According to Credit Suisse’s annual global wealth report, which tracks wealth in 20 countries, last year the typical adult Australian’s wealth – assets minus debts – reached almost $336,000.

Soaring property prices lifted our median wealth by $38,000, enough to put us just ahead of Belgium and New Zealand. Our residential property prices rose by almost 24 per cent during the year.

We had about 2.2 million millionaires – measured in US dollars – up from 1.8 million in 2020.

So, what’s the catch? Well, I’m sure there’s nothing wrong with the bank’s calculations. And there’s no denying we’re a rich country, whether by this you mean our annual income, or the value of the net assets, physical and financial, of our households.

No, the problem is that so much of our wealth comes from the value of our home. Do you believe our homes are so much bigger or better, or better located, than homes in North America or Europe?

I doubt it. If not, then what we’re really saying is that the land on which our homes are built is much better than the land on which the Americans and Germans – and Kiwis – have built their homes.

Really? We have better views? Better soil quality? Less chance of getting flooded or burnt out?

No. If the market price of our residential land is higher than their market price, it’s just because we’ve bid our prices up higher than they have theirs.

And how exactly does doing that make Australians richer than people in other countries? If it does, why don’t we keep bidding our prices up until we’re twice as rich as we are now?

See what I’m saying? It’s not something economists talk about much but, as former Reserve Bank heavy Dr Tony Richards explained in a speech many moons ago, the notion that the high prices we charge and pay each other for our homes makes the nation richer is an illusion.

“The increase in housing prices has been a mixed blessing for Australians. At one level, rising housing prices have made many people feel [note that word] wealthier and have contributed to higher levels of consumer spending than might otherwise have occurred. But they have also resulted in concerns about housing affordability,” he said.

“The difference in views reflects the fact that housing is not just an asset but also a consumption item. When housing is thought of purely as a consumption item, it would seem that in aggregate we would be better off if its price were lower.

“Because we all need to consume some level of housing services, either rented or purchased, a higher level of housing prices and rents allows less spending on other items.”

Get it? It seems that, as a nation, Australians value owning their own home, and making sure it’s a good one, more than the people in many other rich countries do.

In consequence, we devote more of our incomes to housing than they do, meaning we spend a smaller proportion of our incomes on everything else. So, to that extent, home ownership really is the Great Australian Dream.

It’s because, as a nation, we can never spend enough on improving our own housing position – although how much we can pay is held back by how much our income allows us to borrow – that house prices have become so sensitive to the rate of interest on home loans.

When rates come down a bit – even during a pandemic – our ability to borrow more prompts more aggressive bidding against other would-be owners, pushing prices up. When, as now, interest rates start going up again, thus reducing how much we can borrow, house prices fall back a bit.

Although there’ve been times when we’ve let our building of extra homes fall behind the growth in our population, over the longer term we’ve managed to keep the two pretty much in line.

So, house prices aren’t high because we don’t have enough houses to accommodate every household. They’re high because some houses are better than others – bigger, newer, flashier, or better located, nearer the beach, nearer other well-off people, or nearer the centre of the city – and we compete with others to get the best we can (barely) afford. And because many home owners want to own more than one, as an investment.

As well, prices in the most desirable parts of the city are higher because of government restrictions on packing in more households by building up rather than out.

But here’s the punchline. Just because higher house prices don’t make us wealthier as a nation, this doesn’t stop them making some Aussies wealthier than other Aussies. Which, for many of us, is what we’re after. Housing is one of the main things we’ve allowed to widen the gap between rich and poor.

And I thought we were supposed to be proud of our Aussie egalitarianism.

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The housing dream that became a nightmare - and isn't over yet

If you think the rich are getting richer, you’re right – but maybe not for the reason you think. It’s mainly the rising price of housing, which is steadily reshaping our society, and not for the better.

We know how unaffordable home ownership has become, but that’s just the bit you can see, as the Grattan Institute’s Brendan Coates outlined in the annual Henry George lecture this week, “The Great Australian Nightmare”, a magisterial survey of housing and its many implications.

But first, let’s be clear what we mean by “the rich”. Is it those who have the most annual income, or those who have the most wealth – assets less debts and other liabilities? The two are related, but not the same. It’s possible to be “asset rich, but income poor” – particularly if you’re living in your main asset, as many oldies are.

The Productivity Commission argues that the distribution of income hasn’t got much more unequal in the past couple of decades, though Bureau of Statistics’ figures for the growth in household disposable income over the 16 years to 2019-20 seem pretty unequal to me.

They show the real income of the bottom quintile (20 per cent block) grew by 26 per cent, which wasn’t much less than for the middle three quintiles, but a lot less than the 47 per cent growth for the top quintile.

Two points. One, the top one percentile – the chief executive class – probably had increases far greater than 47 per cent, which pushed up the average increase for the next 19 percentiles.

It’s CEO pay rises that get publicised and leave many people convinced the rich are getting richer – which they are.

The other point is Coates’: if you take real household disposable income after allowing for housing costs, you see a much clearer gradient running from the lowest quintile to the highest.

The increase in the bottom quintile’s income drops from 26 per cent to 12 per cent, whereas the top quintile’s growth drops only from 47 per cent to 43 per cent.

Get it? The rising cost of housing – whether mortgage payments or payments of rent – takes a much bigger bite out of low incomes than high incomes.

“People on low incomes – increasingly, renters – are spending more of their income on housing,” Coates says.

But it’s when you turn from income to wealth that you really see the rich getting richer. Whereas the net wealth of the poorest quintile of households rose by less than 10 per cent, the richest quintile rose by almost 60 per cent.

And here’s the kicker: almost all of that huge increase came from rising property values.

Other figures show that, before the pandemic, the total wealth of all Australian households was $14.9 trillion. Within that, the value of housing accounted for nearly $10 trillion.

Over the past 50 years, average full-time wages have doubled in real terms. But house prices have quadrupled – with most of that growth over the past 25 years.

Be clear on this: research confirms that the huge increases in home prices relative to incomes in advanced economies in the post-World War II period has mainly been driven by rising land values, accounting for about 80 per cent of growth since the 1950s, on average, with construction and replacement costs increasing only at the rate of inflation.

Coates reminds us that, within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home. These days, plenty of people even on middle incomes can’t manage it.

It’s obvious that the better-off can afford bigger and better homes than the rest of us. Many probably also have an investment property or three.

But it’s worse than that. Coates says the growing divide between those who make it to home ownership and those who don’t risks becoming entrenched as wealth is passed on to the next generation.

An increasing share of our wealth is in the hands of the Baby Boomers and older generations. The swelling of our national household wealth to $14.9 trillion – largely concentrated among older groups – means there's an awfully big pot of wealth to be passed on, he says.

“Big inheritances boost the jackpot from the birth lottery. Richer parents tend to have richer children. Among those who received an inheritance over the past decade, the wealthiest 20 per cent received, on average, three times as much as the poorest 20 per cent.”

In fact, one recent study estimates that 10 per cent of all inheritances will account for as much as half the value of bequests from today’s retirees, he says.

“And inheritances are increasingly coming later in life. As the miracles of modern medicine have extended life expectancy, the age at which children inherit has increased.

“The most common age to receive an inheritance is late-50s or early-60s – much later than the money is needed to ease the mid-life squeeze of housing and children.”

Coates says large intergenerational wealth transfers can change the shape of society. They mean that a person’s economic position can relate more to who their parents are than their own talent or hard work.

Coates argues that the ever-growing unaffordability of housing caused by present policies – which politicians on both sides keep promising to fix, but never do – is not just making our society increasingly divided between rich and poor, it’s also making the economy less efficient.

In modern, service-based and information-dependent economies, “economies of agglomeration” – benefits from firms and people living and working close together – mean productivity, innovation and wages are greatest in big cities.

But if we don’t pack in enough housing, and so cause house prices to go sky high, we don’t get all the benefits. Long commutes make it harder for both parents to work. The economy becomes less “dynamic”, and productivity is slow to improve. Not smart.

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We've been electing governments that damage our kids' future

One of the most dismal ideas for our youth to entertain is that their lives won't be as comfortable as their parents'. Everyone in the older generation knows how much their lives have improved over the decades, and how much better off we are than our parents were.

We've come to regard continuous improvement in living standards and quality of life over the generations as part of the natural order. Our pay-off for living in a capitalist economy.

So how can our kids have become so pessimistic about the future? How can they imagine their parents would allow such an appalling prospect to befall their offspring? Isn't improving their kids' chances in life a big part of the reason parents work so hard?

Isn't it why so many parents pay so much to send their kids to private schools? Isn't preserving their kids' inheritance the reason the well-off retired fought so hard against Labor's plan to take away their dividend franking credits?

How could any government that presided over a significant deterioration in our children's prospects hope to survive?

Trouble is, the kids are right to be so pessimistic. We can't know what the future holds, but we do know that various trends in that direction are well-established.

And the plain truth is that one way governments have got themselves elected and re-elected in recent decades has been to pursue policies that favour the old and don't worry about the young.

Politicians have been tempting us to put our immediate interests ahead of our offspring's future – and it's worked a treat.

This week the Actuaries Institute of Australia published a new index of intergenerational equity, which compares the "wealth and wellbeing" of people aged 65 to 74 with that of people aged 25 to 34 between 2000 and 2018.

Note that this is before any effect of the coronacession. And remember that the faces in these two aged groups keep changing as people age. No one who was between 65 and 74 in 2000 is still in that group now.

Since the Baby Boomers were born between 1946 and 1964, probably more than half of them were in the 65 to 74 age range by 2018. And the Millennials were joining the 25 to 34-year-olds.

The actuaries have divided "wealth and wellbeing" into six "domains": economic and fiscal (allocated a subjective weighting of 30 per cent in the index), health and disability (20 per cent), social (including rates of homelessness, incarceration and being a victim of robbery; 15 per cent), environment (15 per cent), education (10 per cent) and housing (10 per cent).

The scores for people aged 65 to 74 in 2000 were given an index value of 100. In the same year, the scores of people aged 25 to 34 amounted to 70. It's hardly surprising that people 40 years younger have significantly lower scores. They've had much less time to gain promotion, earn, save and pay off a home (or even receive an inheritance).

No, what matters more is how the two groups' scores have changed over time. Over the 18 years, the older group's score has risen to 115, whereas the younger group's score has fallen to 69.

Turning to the size of the young's deficit relative to the old, it improved from minus 30 to minus 11 between 2000 and 2006 – presumably mainly because the young did well in the resources-boom-driven labour market – but then deteriorated to minus 20 by 2012.


That year, 2012, was when the resources boom started winding down. And it was when the Baby Boomers started reaching 65. Over just the six years to 2018, the young's deficit relative to the old worsened dramatically to minus 46.

But why has the position of the young relative to the old deteriorated so badly since 2006? Well, they've benefited from improving health, as life expectancy has increased and rates of disability have decreased.

They've benefited also from increasing levels of educational attainment and, socially, from modest reductions in the gender pay gap and falling rates of robbery (which affect the young more than the old).

But these gains have been more than countered by losses in other domains. In ascending order of loss, young people have suffered economically as, since the global financial crisis, education-leavers have taken much longer to find full-time jobs; government spending has been skewed towards older generations (higher spending on health, pensions and aged care, but less on the rate of unemployment benefits) and public debt has risen.

The young have suffered in housing, as the rate of home ownership for their age group has dropped from 51 per cent to 37 per cent over the past two decades. But their greatest loss (sure to grow in coming years) is from the deterioration in the natural environment: rising carbon emissions and temperatures, the drying Murray-Darling Basin and declining biodiversity.

And all these trends before the likely weak and prolonged recovery from the coronacession scars the careers and lives of another generation of education-leavers, without governments or voters being too worried about it.

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Inequality not as great as claimed, worse than others admit

This week the Productivity Commission issued a “stocktake of the evidence” on inequality in Australia. Its findings will surprise you. But it wasn’t as even-handed as it should have been.

Its report forcefully dispels the myths of the Left – that inequality is great and rapidly worsening – but is much more sotto voce in telling the Right there’s still a problem and that the reason it’s not as bad as some think is that governments have taken corrective actions the Right usually disapproves of.

This has allowed the conservative commentators of the national press to greet the report with great glee. One in the eye for their ideological opponents. Inequality? Nothing to see here.

The report looks at three different measures of economic inequality – the distribution of income, consumption and wealth – over a long period: the 27 years from 1988-89 to 2015-16. It focuses on the experience of households rather than individuals, and eliminates the effect of inflation.

The report concludes that inequality has risen only slightly over the period. Measured by the Gini coefficient – where zero means perfect equality and 1 means one household has everything – the distributions of both income and consumption have risen slightly.

The distribution of household wealth (mainly owner-occupied housing and superannuation savings) is most unequal of the three. It, too, has become a bit more unequal over the period.

But, particularly for income, inequality increased during the resources boom of the mid-noughties, then decreased in the years following the global financial crisis of 2008.

Over the 27 years, the disposable income of all households rose at an average rate of about 2.2 per cent a year in real terms.

The annual incomes of households in every decile (10 per cent group), from the bottom to the top, increased. It won’t surprise you that average incomes in the top two deciles rose by more than the economy-wide average. The top decile’s average income rose by more than 2.5 per cent a year.

It will surprise you that average incomes in the bottom decile rose at the same rate as the economy-wide average. So it was households between the bottom 10 per cent and the top 30 per cent whose incomes rose by less than the national average.

Many people would be surprised by all this. Why? Because they hear what’s happened in America and assume it must be pretty similar here. Wrong.

The report notes that our progressive income tax and highly means-tested welfare payments do a lot to equalise household incomes (as I’ve written recently in this column).

Our income inequality in 2015 was about average for the rich countries. In 2017, our wealth inequality was eighth lowest among 28 rich countries.

Australians’ chances of moving between higher and lower income groups – a rough measure of equality of opportunity – “compare favourably with many other developed countries”, the report says.

It tells us that, at 9 per cent of Australians – 2.2 million people – our rate of poverty (measured as people with incomes below half the median income) is no higher than it was 27 years ago.

But if all these truths tell you we don’t have much to worry about, you’ve been misled. The report is much less up-front in reminding us of the qualifications to its findings.

It leaves the strong impression that, if inequality hasn’t increased much, and isn’t as great as in some other countries, there’s no great problem. This implies the inequality we started with was fine.

As Professor Peter Whiteford, of the Australian National University, has noted, the report does too little to remind us that all the averaging involved in Gini coefficients and decile groups rolls households who’ve gained together with households who’ve lost and tells us little has changed.

For instance, the report downplays the issue of the huge increase in the incomes of the top 1 per cent of households. Their extreme gains are averaged with the more modest gains of the next 9 per cent to give a rise in the incomes of the top decile that’s high compared with the rest of us, but not greatly so.

Since the increase in inequality occurred during the resources boom, the report notes quietly that, contrary to what conservative politicians keep telling us, “[economic] growth alone is no guarantee against widening disparity between rich and poor”.

True. Then we’re reminded that this increase in inequality went away in the long period of weak growth following the financial crisis.

So what does the Productivity Commission want us to conclude? Let nature take its course? Don’t worry about increasing inequality because the next recession will fix it?

The report’s fine print acknowledges the truth that a country’s degree of inequality is greatly influenced by its economic institutions (such as its tax system and the rules of its welfare system), by government policy changes, and by the public’s attitudes to inequality.

I happen to agree with the commission’s value judgement that the growing gap between the top 1 per cent of incomes and middle incomes isn’t of as great concern as the gap between the bottom and the middle.

But I don’t accept another implicit value judgement that not much more could be done to reduce income and wealth inequality (presumably, for fear the rich would stop wanting to get richer) and that, at the bottom end, the government should limit its intervention to assisting those poor people whose disadvantage has become “entrenched”.

In other words, don’t acknowledge that poverty is being kept high by successive governments’ refusal to lift the freeze on real unemployment benefits.

The report proudly informs us that the bottom decile’s income has kept pace with the economy-wide average, but does little to explain how this amazing truth came about.

The chief suspect is the Rudd government’s increase in the base-rate of the age pension, a boost so big it seems to have more than offset the adverse effects of the real dole freeze and the bipartisan policy of moving disabled and sole-parent pensioners onto the much lower dole.

Still think there’s nothing to see here?

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Why the very rich have got richer

Everyone knows the gap between rich and poor has been widening in most developed countries, but why is it happening? Have the rich been smarter and harder working, or have they just been craftier than the rest of us?

Between the end of World War II and sometime in the 1970s or '80s, the gap got progressively narrower, reducing inequality. Since then, however, the trend has reversed and the rich have got richer faster than the poor have got less poor.

That's particularly true for the English-speaking rich countries, though it hasn't happened as much in Oz as it has in Britain and, especially, the United States.

Here, real incomes have increased at the bottom, the middle and the top, though they've risen a lot faster at the top. And the respective shares haven't changed much in very recent years.

It remains true, however, that Australia's been part of the international trend to exceptionally strong growth in incomes right at the top of the distribution, say, the top 1 per cent.

In Australia's case, Professor Paul Frijters, of the University of Queensland, and Dr Gigi Foster, of the University of NSW, sought to explain this growth in top incomes in a paper published in the Australian Economic Review.

At the level of theorising, they say there are two rival potential explanations: that incomes have become more unequal as a byproduct of market forces, or as a result of political decisions.

The first explanation focuses on a shift in the "marginal productivity" of skills. Changes in technology – the obvious candidate being the information and communication revolution, aka computerisation and digitisation – have increased the value of certain highly skilled jobs relative to other, less skilled, more routine jobs.

This economists refer to as "skill-biased technological change". Some jobs are replaced by machines, others are in greater demand because of the need for people to control and maintain the new machines and to manage a more complex organisation.

In such a world, you'd expect the wealthiest people in the community to be highly technically trained and great organisers – people like Bill Gates and Warren Buffett.

A related phenomenon is what the authors call "increasing returns to superstars", but is otherwise known as the rise of "winner-takes-all" markets.

Legal and sporting contests, for example, reward people not so much because they're highly skilled but because they're more highly skilled than others.

Such rewards increase with the size of the market in which the contest occurs.

"Moving from a world where every town runs its own competition to one where a single high-stakes competition is held for a whole country, or the whole world, involves the replacement of local winners with uber-winners who enjoy far higher returns but of whom there are far fewer per type of contest, resulting in a more unequal overall income distribution," Frijters and Foster say.

"This kind of effect explains the enormous salaries earned by today's soccer stars, top artists, top financial advisers, inventors who obtain patents, and so on."

It's advances in communication technology that do most to explain the increased scale of many markets. Bigger scale means a bigger gap between people at the top of the world market and winners in the local market.

The returns to innovation are also much greater in a global market than in a local one, because you're pushing out for the whole world what economists call the "production possibility frontier" – increasing the menu of different goods and services we're able to produce.

The alternative explanation for growing inequality – especially at the very top – is the effect of political favours.

"Our democratic political process both sets the rules of economic interaction amongst market agents [participants] and allocates political favours, including taxes and subsidies. In this view, each institution within a country's bureaucracy has some discretionary power of its own," the authors say.

The political balance of power may change and lead to changed taxes and transfer (welfare) payments in ways that favour the rich and hurt the poor. This may happen by accident or by political design.
It may happen because interest groups become more effective at lobbying governments or because the rich become better at exploiting loopholes in regulations or taxes.

So much for theoretical possibilities. What hard evidence can we find to help us choose between those possibilities?

A study by Sir Anthony Atkinson, a British world expert on inequality, and Andrew Leigh, former economics professor and now federal Labor politician, found that reductions in tax rates explain between a third and half of the rise in the income share of the richest 1 per cent in five English-speaking countries.

But Frijters and Foster took the unusual approach of seeing what clues they could deduce from studying the BRW magazine's list of the richest 200 Australians in 2009. They found that the industry category producing the largest number of super-rich Aussies – 61 – was buying and selling property.

Natural resources was second with 23, then "organising financial investments" with 19. "These 103 cases account for the vast bulk of the $119 billion owned by the top 200 in 2009."

Only eight families in the top 200 held large amounts of inherited wealth and all eight were in those three industry categories. So most of the money of our super-rich was made relatively recently.

As best the authors could determine, only five people on the list invented things. Another five were top entertainers. So only 5 per cent of our super-rich could be classed as superstars or top innovators.

About half spent their efforts on activities where local political decisions determine the winners: about who gets to build which property where, who gets access to favourable mining concessions, and so on.

On the basis of this evidence – which is hardly definitive – the authors conclude that "the political favours story seems more likely than the marginal productivity story".

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It's fine to be well-off so long as you pay your whack

It's no doubt true, as many commentators are saying, that Labor has won itself no points by reminding us how wealthy Malcolm Turnbull is. We hear frequently about "the politics of envy", but actually there isn't a lot of it about these days. You've done well? Good luck to you.

In any case, I think there's huge goodwill towards Turnbull. Everyone can see how super smart he is, and we're hoping he'll use that smartness to make Australia a better place to live. A nation with less divisiveness, less fear that baddies are out to get us, more unity, a more positive vision of what we can become and more of us doing our bit to make it a reality.

As with any politician, he'll have his share of policies we disagree with, but it would be so nice to have a prime minister all of us can be proud of.

We might even vote to keep him, despite some disagreement on particular issues. Politicians come as a package, and you never like every item that's in the Christmas hamper.

But to say few Australians envy the well-off is not, I hope, to say we don't mind how little tax they contrive to pay, or how hard they struggle to avoid their obligations to the rest of the community.

Turnbull says of himself and his wife, Lucy, that "we've worked hard, we've paid our taxes, we've given back". It's the giving-back bit I like. And, of course, paying your taxes – in Australia, and in full, according to Turnbull – is the first and most basic way we "give back".

What really gets to me is not the people who've done well for themselves, but their seemingly growing inclination to be mean and grasping about it. I hate their selfishness and their self-congratulation.

I've worked hard for all I've got, it's all mine, but now you have the effrontery not just to make me pay taxes, but want me to pay a lot more than other people.

Taxation isn't theft and never was. Taxes are the price we pay for a civilised society, as someone once said. And he was even an American.

Expecting the better-off to pay a higher proportion of their income than the less well-off isn't socialism – as the better-off increasingly tell each other on social media - it's the Australian way. You put more in and you get back less. Why? Because you're fortunate enough to be able to afford it.

The Aussie way is that if you don't need the dole or the pension, you shouldn't get it. What's more, you should be too proud to ask for it.

It's not the Aussie way to boast about how much tax you pay, but perhaps we'd be better off if it was. Tax-paid as a status symbol. I paid far more tax than you did last year – see how successful I am?

As for self-congratulation, the bit I liked best in Turnbull's defence of his wealth was his lack of it.

"The fact is that Lucy and I have been very fortunate in our lives ..." he said. "I don't believe that my wealth, or frankly most people's wealth, is entirely a function of hard work.

"Of course, hard work is important but, you know, there are taxi drivers that work harder than I ever have and they don't have much money. There are cleaners that work harder than I ever have, or you ever have, and they don't have much money."

The world is full of people – mainly men – claiming to be "self-made" who are anything but. They seem utterly oblivious to the extent to which their wealth is owed to good fortune rather than hard work.

We're all fortunate to live in Australia. Baby boomers are fortunate to have been born at a time when few were required to go to war, when you could get a good education at little cost, leading to a good job and little unemployment. When buying a home wasn't all that hard and you got in early for a 40-year stint of ever-rising house prices.

It's only relatively recently that many people have begun inheriting sums of money worth talking about. But to see yourself as self-made merely because you inherited no wealth is self-delusion.

IQ is, to a large extent, inherited. And EQ – self-discipline and the ability to get on with other people – is often something we gain from our parents' example. It's good fortune to be born into a family of readers.

All this is why "equality of opportunity" is a worthy goal for public policy, but something no government could ever get anywhere near attaining.

Back to Turnbull: "There is a lot of luck in life and that's why all of us should say, when we see somebody less fortunate than ourselves, 'There but for the grace of God goes me'."

You don't have to be any kind of believer to believe that – and be better for it.

Giving a helping hand to those who weren't issued with as much grace as we were is why, brothers and sisters, we should pay our fair whack of tax and do it cheerfully, grateful we can so easily afford it.

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Growing signs young won't do as well as their olds

Will today's young people end up better off than their parents? That used to be a stupid question. Of course they will. But these days, it's much less certain.

We've come to expect that each generation will be better off than its parents, with more income, better housing and better healthcare.

But many young adults have begun to doubt it. According to one opinion poll, only 22 per cent of respondents under 30 considered they would have a better life than their parents.

And now a report by the Grattan Institute think tank, The Wealth of Generations, has found evidence to support the fear that today's generation of young Australians may have lower standards of living than their parents at a similar age.

It's a question of what's likely to happen to their incomes and what's happening to their wealth.

Our wealth is our assets (property, superannuation and other financial investments, and money in the bank) less our liabilities (mainly debts).

Wealth is like congealed income. We can usually turn it back into money should we need to. Some of it produces income (rental properties, financial investments) and some reduces our need for income, such as when we live in our own homes rather than renting.

We add to our wealth when we save some of our annual income. Most of us save more than we think we do, by paying off a mortgage over 20 or 30 years, or by having our employer fulfil the government's requirement to put 9.5 per cent of our wage into super.

We also add to our wealth when the market value of the assets we own rises – "capital gain". And, of course, when we inherit the wealth of our relatives or receive a gift of money from them.

The wealth of Australian households has grown a lot over the years, even after allowing for inflation, as all the figures I'll quote do. But the report, by John Daley and Danielle Wood, finds that over the past decade, older households captured most of the growth in the nation's wealth.

Despite the global financial crisis, households aged between 65 and 74 in 2011-12 were, on average, $215,000 better off than households of that age range were eight years earlier. Those aged 55 to 64 were $173,000 richer, on average.

But the average household in the 35 to 44 age group was only $80,000 richer. And get this: those aged 25 to 34 actually had less wealth than people of the same age 8 years earlier.

Why? Various developments have conspired to bring this disparity about. Probably the biggest is what's happened to house prices and home ownership.

Rates of home ownership have fallen over the past two decades for all but the oldest households, the report finds. Going further back to 1981, more than 60 per cent of 25 to 34-year-olds were home owners. Thirty years later only 48 per cent of people in that age group were owners.

An increasing proportion of those born after 1970 will never get on the property ladder, according to the authors. If increasing education debts aren't already discouraging younger households from taking out mortgages, it sounds like it won't be long before they will be.

This means a higher proportion of the younger generation missed out on rising housing wealth as house prices boomed. Between 1995 and 2012, house prices increased by an average of 4.3 per cent a year faster than inflation. This was much faster than the rise in full-time wages.

The boom was caused by the greater availability of home loans, the return to low inflation in the mid-1990s and by our failure to build enough new dwellings to keep up with population growth.

The later you were to get in on it, the less the boom's capacity to increase your wealth, particularly because you had to borrow so much to join. But the worst of it for young people is that, though house prices are likely to stay high (making it hard to afford the entry fee), they can't possibly keep rising at the same rate (meaning the prize for getting in won't be as big as it used to be).

There's more to the problem than housing, however. Incomes also grew fastest for older people, allowing them to add more to their wealth through saving. In 2004, households aged 55 to 64 were net spenders; by 2010, with average annual incomes $4600 higher, their net annual saving was $2700.

Although households aged 25 to 34 kept their spending controlled, their average incomes increased by $3100 and their saving by $1500.

A big part of the reason for this is that, over the years, government spending and taxation policies have become more favourable to the elderly than they were. The age pension's been made more generous while income from super is now tax-free.

Who has gained most from the big budget deficits we've been running since 2009? The old. Who will eventually have to pick up most of the tab? The young.

All this wouldn't be such a worry if we could be confident that incomes will keep growing as strongly in the future as they have been for 70 years. They may.

But it isn't hard to think of reasons why they may not – including the thing none of us is allowed even to think about: climate change.

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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.

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