Australia’s economy has gone so well that we’ve ended up on a pretty weird list: we show up in the top 20 countries for growth of wealth over the last decade.
This data comes from New World Wealth and shows up in a new report from AFRAsia, a bank based in Mauritius.
The fastest growing countries for wealth are a ragtag bunch, for one good reason. What Ethiopia, India, Vietnam and China have in common is they started off with a lot less. It’s far easier to double your wealth per capita when you start off with a sum like $10,000, rather than $150,000. (Australia’s wealth per capita sits at US$279,200 in 2017, according to the report.)
Australia’s appearance on this list, halfway between Indonesia and Rwanda, is a sign this country of ours is very peculiar. Wealth has been growing at an exceptional speed, driven by huge growth in housing prices.
That is good and bad.
Compared to a country like Saudi Arabia, where oil is concentrated in the hands of a few, Australia’s source of wealth is more democratic. Just 28% of our wealth is held by millionaires (in USD terms). That’s the same as Sweden and lower than Saudi Arabia (60%), Russia (58%), and the US (36%). Home ownership in Australia is also more widespread than company ownership.
This is not to imply rising house prices create a utopic equality. Anyone who does not own a house, including this correspondent, tends to feel rather despondent about rising house prices. And home ownership rates are falling. But 65% of Australians still own a home.
(The report also shows that Australia is the world’s most popular destination for migrating millionaires; 10,000 foreign millionaires came to Australia last year, ahead of America, which attracted 9000. This data-point may be useful in thinking about whether Australia needs to cut the rate of top personal income taxes. But back to housing.)
The trouble with housing-centred wealth
Wealth based on housing has one peculiar feature: if you want to continue to live in Australia, it is hard to make it spendable. Housing is illiquid.
If you sell your house you still need to buy housing services — most often by buying another house. That will cost a lot. So housing wealth can be frustratingly inaccessible.
A common way in which housing wealth becomes spending money is if you downsize in the same city. Moving from a $1 million home to one 20% cheaper yields $200,000 in spending money. Not a bad bonus for the empty-nester trying to find a lower maintenance lifestyle.
This charming feature of the housing market is, of course, mirrored by equal and opposite frustration for the young family seeking extra space. Trying to move out of the small home and into the large home now requires an additional $200,000.
This is not a pure zero-sum game, but it is close. The lack of upside for Australia as a whole is understood at the highest levels. A few years ago, when he was a humble deputy, the man who is now Reserve Bank governor pointed out that rising house prices are mostly an illusion of wealth.
“Have we really become wealthier as a nation simply because the value of our land has increased? The answer would clearly be yes if this increase was because we had discovered more land. To my knowledge, though, this has not happened,” said Philip Lowe in August of 2015.
“From the perspective of society as a whole, much of what is gained on the one hand is lost on the other: there are windfall gains from higher land prices but then everyone pays more for housing services.”
Après le déluge
Now housing prices are falling in Australia. Sydney is down by 2.1% in the year to May and Melbourne by 0.9%, according to Corelogic data. ANZ Bank says the fall is “quite a bit larger” than they expected it to be.
It is unclear if the falls will reverse or continue. On the one hand, economic growth and immigration are strong. On the other, a lot of new housing in the central parts of Melbourne and Sydney is yet to be completed and sold.
We know a fall in housing prices will cause a widespread reduction in wealth. But it won’t change the houses themselves, so the change in wealth won’t affect most people’s buying power. So is it a wash? Unfortunately not.
Where we might run into trouble is at the shops. It is well-known that rising housing prices cause home owners to spend more money. Falling house prices could reverse that effect and crimp the consumer economy. If that happens, layoffs and rising unemployment won’t be far behind, and that will have a real effect.
It will be fascinating to look at the report for Australian wealth growth in 10 years. Anyone want to bet Australia will be in the top 20 in the period 2017-2027?
Unfortunately Australia’s wealth has been tied up in housing since the 1970’s when manufacturing began to give way to cheap foreign imports and banks began to fund the conversion of fibro worker’s houses to brick veneers, an on-going, suburban vanity project.
“A dwelling house, as such, adds nothing to the income of its inhabitants” wrote another author on the same subject some time ago.
Such a non wealth producing asset then has to be subsidised by the other productive sectors of the economy, doesn’t it?
Absolutely.
At the rate we’re going in ten years we will be a “third world” country basically servants to China (and the multi nationals) as they reap the benefits of our natural resources which we’re giving to them hand over foot! We’re fooked!
True, Jason. Phillip Lowe’s comments on the illusory nature of ‘wealth’ increase from higher house prices is dead right, and good to hear it from the highest echelons of economic reasoning.
Trouble is, many households don’t see it that way, and they might not be as fiscally responsible as they should be.
The converse, which you don’t mention, and which is most significant, is that real money is pulled out of the economy because mortgage payments drain families of the capacity to spend on other things. A whole generation is now paying off mortgages that are multiples of what they could have paid if this were ever managed well. John Howard only saw the upside of the rise in house prices, and didn’t get this argument of illusory wealth. He genuinely thought it was a good thing, as any suburban accountant without any real understanding of numbers might do.
And house prices have never been an issue of the demand and supply of homes, it has always been about the demand and supply of credit. Banks were allowed virtual open slather, and why would they pull their heads in when there were bonuses to be had.
A largely de-regulated finance industry makes us all poorer, and this is just another example.
Good point about easy credit. The banks should never have been allowed to be so generous re credit for housing. The inescapable consequence was that we would jointly bid up each other’s housing as high as could be borne.
‘ Moving from a $1 million home to one 20% cheaper yields $200,000 in spending money. ‘
Not in reality. In Qld deduct the commission payable to the agent who sells the $1M property, around $25K (not including marketing costs). The stamp duty on the $800K property is $31K. Which leaves, at most, $144K . I believe stamp duty is higher in other states.
How about some sources? The latest OECD data shows Australia’s Gini coefficient was 0.33 in 2014, ranking 22nd, behind the majority of the 35 OECD countries. According to Credit Suisse, the top 1% own more wealth than the bottom 70% of Australians combined. That doesn’t sound very democratic to me.