How the rich are getting richer
The past year has been very good to Australia’s very rich.
In the 12 months to mid-2017, according to data just released by the multinational financial services group Credit Suisse, the number of “ultra-high wealth individuals” in Australia – that is, those worth more than $US50 million – grew by 30 per cent.
Actually, it was a pretty good year for the super-rich everywhere. Globally the number of people with assets of $US50 million plus grew 13 per cent. But Australia was a standout.
Not only did the ranks of the ultra-rich balloon to some 3000 here, the number of people worth more than $US1 million also shot up more than 20 per cent. Two hundred thousand new millionaires were created in the year, taking Australia’s total number of millionaires to some 1.16 million. Credit Suisse predicted Australia would add another 500,000 or so millionaires over the five years to 2022.
Across the globe, the report said: “No other part of the wealth pyramid has been transformed as much since 2000 as the millionaire and ultra-high net worth individual (UHNWI) segments. The number of millionaires has increased by 170 per cent, while the number of UHNWIs has risen five-fold, making them by far the fastest-growing group of wealth holders.”
Credit Suisse calculates that the average Australian adult now is worth $US402,600, the second highest figure in the world after Switzerland. Although median wealth – the midpoint, at which as many have less as have more – is less than half that, at $195,417.
Despite the phenomenal growth in high-end wealth, though, Australia maintained “relatively low” levels of economic inequality, the report said. Only 5 per cent of Australians have net worth below $US10,000, compared with 19 per cent in Britain and 29 per cent in the United States.
Apart from a couple of minor caveats, the Credit Suisse report painted a very happy picture of Australia.
Another report that also came out this week, though, was far less rosy. It was the twice-yearly rental affordability index, compiled by National Shelter, Community Sector Banking and SGS Economics and Planning, which looks at the rental prices relative to people’s incomes.
The findings varied somewhat by city, but the overall picture, says National Shelter’s executive officer Adrian Pisarski, is this: “There’s virtually no affordable housing in any capital city for people on low incomes.”
He says the report defines people in housing stress if they are in the bottom 40 per cent for household income and pay more than 30 per cent of their gross income in rent.
“In most of our capital cities,” he says, “under about $60,000 household income a year, nobody has affordable rent.”
Housing stress is evident even among renters further up the income scale, too. “There are moderate-income Australians as well, paying 40, 50, 60 per cent of their income just to rent housing,” he says.
Various factors have exacerbated the problem: investors, particularly foreign ones who purchase properties and leave them vacant; lack of government investment in public housing; low wage growth and the failure of welfare payments to keep up with even that modest increase in wages.
But perhaps most dramatic of all is the decline in home ownership rates, which has vastly increased the number of people renting.
Over the past 20 years, the proportion of people who own their homes outright has fallen from about 41 per cent to 31 per cent. For 15 years or so, the decline in outright ownership was offset to some extent by a steep increase in the number of people paying off mortgages. Between 1996 and 2011, the proportion of people living in mortgaged homes rose from 25.5 per cent to 35 per cent.
“But since 2011,” Pisarski says, “mortgage ownership has declined, too. The only numbers going up are renters.”
The census tells the story. In 2001, just over a quarter of households rented. By 2016, just under 31 per cent were renters – within a whisker of the number who owned their homes outright.
In its global wealth report, Credit Suisse noted an anomalous feature of Australia’s apparent wealth: it was “heavily skewed towards non-financial assets” and based on “high property prices in the largest cities”.
One consequence of that is the production of large numbers of new millionaires among property owners. Another is that younger Australians are increasingly locked out of home ownership.
But that’s not all, Pisarski says.
“Another result of that – because our whole retirement incomes policy is predicated on people owning their home outright at retirement – there has been a real increase in the amount of homelessness among older people and particularly older women, who don’t have much super and don’t own a house.
“We’ve been treating our low-income households really poorly for a long time and we have a situation of poverty like we haven’t had since the 1970s.”
It continues to get worse. In the year to October, according to the property data and analytics firm Core Logic, rents across Australia went up about 40 per cent more than wages.
So the question is, how does this on-the-ground reality square with the Credit Suisse report’s assertion that Australia remains a relatively economically equal society, even as it grows richer?
Pisarski has no real answer, beyond suggesting it’s a matter of “lies, damned lies and statistics”.
“I think it’s about averages. The average figure is skewed by a lot of high-income earners, [which] masks the problem at the lower end of the spectrum.”
The debate about economic inequality, the extent to which it is worsening – if indeed it is worsening – and whether that matters, has been a hot one for years, and particularly since the global financial crisis almost a decade ago. It is an argument both academic and ideological. It drove the Occupy movement and continues to drive populist, nativist and isolationist politics across the developed world. A wealth of analysis suggests it played a big part in the election of Donald Trump, along with simple racism.
It has seen previously staunch defenders of the economic orthodoxy of free markets, such as the World Bank, the G20 and the OECD, issuing cautions about the need for “inclusive” growth, and progressive economists such as Thomas Piketty arguing that the neoliberal economic model is fundamentally flawed.
In many economies – especially the US – the increase in inequality has been dramatic, driven by decades of flat wages and booming returns on capital.
In the Australian context, however, there are still plenty who deny there is a problem, notably Treasurer Scott Morrison.
In July he said he did not accept “this idea, that people and inequality and incomes have been going in the wrong direction – that’s not borne out by the facts”.
According to the accepted global measure of inequality, the Gini coefficient, said Morrison, “it hasn’t got worse … it’s actually got better”.
Morrison was promptly contradicted by the Reserve Bank governor, Philip Lowe, who, when asked whether inequality was rising or falling, replied tersely: “Well, it’s risen.” But Morrison continues to argue inequality has fallen.
This brings us to a third report out this week, from the Liberal Party-aligned Institute of Public Affairs. It is called “Understanding Inequality in Australia”, and unsurprisingly backs the treasurer’s position.
It begins by acknowledging that “there is no perfect measure of income inequality” and then proceeds to dismiss a variety of measures. In particular, it targets work by Labor’s assistant treasurer, Professor Andrew Leigh, previously one of Australia’s foremost academics in the area with the Australian National University, which shows a huge rise at the top end of the income scale. In the early 1980s, Leigh’s numbers show, the top 1 per cent of earners had about 5 per cent of national income. Now, they have 9 per cent. The top 10 per cent of earners increased their share over the same period from about 24 per cent to 32 per cent.
The IPA report does not suggest Leigh’s numbers are wrong, only that they are “inappropriate”.
“Claims about inequality typically don’t account for Australia’s tax and transfer system, which substantially lowers measured income inequality,” the report says.
“The most reliable measure of income inequality, the Gini coefficient, shows income inequality in Australia is relatively stable, slightly lower than it was 15 years ago, and at about the average of comparable nations.”
And that is broadly true. Depending on whose Gini calculation you use, Gini shows income inequality has not moved much over that period.
But, as Leigh points out: “It’s a timing issue. It depends on whether you look over a generation or a few years.”
Leigh asks himself the question. “Has it risen over a generation? Yes. But if you ask whether it has risen over a short period, the answer is no.” The period cited by the IPA included the GFC, he says, “which caused a massive drop in share market returns, which affected the top quite considerably”.
Over a longer timescale – since 1975 – incomes for the top 10 per cent have grown 72 per cent, compared with 23 per cent for the bottom 10 per cent.
Over a shorter period – the past few years, during which wages have largely flatlined as markets have recovered – inequality has grown again.
John Daley, chief executive of the Grattan Institute, says one reason income inequality appears not to have grown much is that it is typically measured by household.
“Low-income men have seen their incomes falling over quite a long period of time,” he says, “but overall low-income households have more or less kept pace with high-income households over 10 or 15 years.” He says one reason is that “there is much more likely to be a second income in the household”.
That is likely changing now, as wages have flatlined and markets have recovered.
“Until about 2013-2014, average Australians were earning more than those of a similar given age 10 or 15 years ago.
“But we think that has changed – we can’t prove it yet – since incomes went flat. I wouldn’t be at all surprised to see the same pattern as happened elsewhere in the world where incomes went flat, and people who are older have continued to do better, while things are going nowhere for younger people, if not going backwards.”
In any case, the more important measure is not income, but wealth – that is the amount people accumulate over time.
“Wealth inequality, in contrast to income inequality, has got a lot worse. A lot worse,” Daley says. “Wealth matters.”
Given that most wealth in this country is tied up in housing, that means housing matters. And that is where the gap between the haves and have-nots is most apparent. There is a “huge” generational component to it, Daley says.
“Tracked over a decade, the typical 45- to 54-year-old household has increased its net wealth about $600,000 … because the value of their assets went through the roof. But that’s a trick that only works once, so you have a generation coming through with much less wealth, and much less chance of getting that kind of windfall.
“To the extent they do get a windfall – when they inherit – they will (a) probably be 60 plus and (b) those inheritances are very wealth-concentrating.”
Daley says Australia used to be a country in which home ownership rates for 25- to 34-year-olds were pretty much the same no matter what your income was. We are not in that country anymore. Now we see a differential of 40 percentage points between high-income and low-income households, aged 25-34.
“It used to be the case that more than 50 per cent of that group bought their own home. Now it’s down in the low 20s. It’s been a dramatic shift.”
Measures such as Gini, he says, do not pick up factors such as imputed rent – how much a home owner would pay to rent the house they’re living in. Nor does it cover transport costs for people driven to the urban fringes by housing costs.
The bottom line: inequality is growing fast, despite what the IPA, Scott Morrison or the bankers of the rich might say.
This article was first published in the print edition of The Saturday Paper on Dec 2, 2017 as "How the rich are getting richer". Subscribe here.