New family wealth data aren’t worthy of tears or cheers

We shouldn’t expect perfect equality in wealth, and real estate gains are not a sustainable source of middle class prosperity

The release of some numbers from a new Statistics Canada wealth survey created a stir this week, as commentators battled to place the findings in context. The release of results from the 2012 Survey of Financial Security are a follow-up to previous rounds of the same survey from 1999 and 2005. The 2012 SHS asked about 20,000 Canadian families detailed questions about their asset holdings and their debts.

On one side of the debate, David Macdonald of the Canadian Centre for Policy Alternatives and the Broadbent Institute focused on the meagre extent of some families’ wealth holdings compared to the big wealth holders at the top. For example, the top 20 percent of families hold 67 percent of total net wealth. On the other side of the debate, commentators such as Margaret Wente argued that the 44.5% growth in median wealth since 2005 was great news for the middle class. In my view, neither side of this argument got things quite right.

For those concerned about the inequality of wealth, I wonder what kind of equality they were looking to see. Wealth has a strong age pattern. Young people start to save and accumulate wealth. When they get older, they have more wealth. (You can see these life-cycle patterns in a paper of mine here.) In an economy where everyone had the exact same incomes, but people saved according to this kind of life-cycle pattern, there would be strong differences in wealth holdings if you put people of all ages into the same pile, as the CCPA and Broadbent Institute do.

Moreover, it is not even clear that we should expect people at the same ages to have similar observed wealth levels. One of the primary reasons for saving is to fund retirement. A large number of Canadians receive enough through our public pension system that they have no need to save–in fact many receive more income in retirement than they did while working. Why should such households save when the government is doing their saving for them?

1999-SFS-660x455

In the graph, I show this lifecycle pattern with data from an older paper of mine that used the 1999 edition of the SFS.  (I can’t use the 2012 SFS because the individual-level data have not yet been released.) There is a clear hump at middle ages. Also, the dispersion across families at a given age can be seen by comparing the 25th to the 75th percentiles.

For these reasons, I don’t find the fact that younger and lower income Canadian households have little savings surprising or particularly concerning.

The other side of the argument upon release of the SFS numbers was celebrating the large increases in median net worth. While this growth in wealth is not a bad thing, it is a matter for debate how much this growth affects anyone’s wellbeing. The reason is that the growth was mostly driven by real estate holdings.

Among economists, there is a long tradition of questioning the extent to which housing wealth should be treated as equivalent to cash in hand. Harvard economist David Wise wrote a series of papers with Steven Venti arguing that housing wealth was not fungible, since people simply didn’t want to use up housing equity and prefered to keep living where they were. My own research with Courtney Coile suggests people don’t typically sell their house until there is a major negative health event for one member of the couple. Other economists have challenged these arguments, and it’s also true that today’s homeowners may be more willing to draw on housing equity through home-equity lines of credit compared to those of earlier generations. Still, if people typically don’t sell their house when prices rise, paper gains won’t matter much.

Another argument comes from Willem Buiter, channeling former Bank of England Governor Mervyn King, in claiming that “Housing Wealth is not Wealth.” Buiter argues that changes in house prices just transfer resources between those who currently have houses and the coming generation who will soon buy houses. Every seller needs a buyer. However pleasant it may be for the present middle class to be enjoying sizable real estate gains, the future middle class will suffer if they have to buy in at exaggerated prices. In this way, wealth accumulation through real estate benefits one generation’s middle class over the middle class of the next.

Taken together, I find myself staked to a position outside either of the two camps described above. I don’t find it odd that young people have fewer assets than older people, but I also don’t think wealth gains driven by real estate price growth is worthy of much celebration.




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New family wealth data aren’t worthy of tears or cheers

  1. First intelligent argument I’ve seen.

    • Agree. I particularly agree with the Buiter point. I had a small service business on VI the first decade or so in the 2000s. Got around to a lot of different houses that rapidly escalated in value.[ 300,000 to 700,000 in a couple of years wasn't that odd] When i pointed out to customers that this was nice for them, but where were their kids going to live, didn’t we risk becoming like some Europeans who have to will everything to the kids before property in the city could change hands within the family? Weren’t they in fact stealing from future generations? You can imagine the frosty reception i got, or just a shrug…”i guess they’ll have to just suck it up and live in a trailer, like i never had to”.
      The worst of it was the smugness…i built the equity up in this house with my own two hands sorta thing – rarely, aren’t i incredibly lucky!
      An interesting lesson in human group think. The prices some people were prepared to outbid each other over for a lousy old cottage with a view on the ocean in order to pull it down and build a mansion were astonishing. Cottages that in some cases you could barely give away a decade or two earlier

    • Some excellent points made. An increase in median wealth based mostly on real estate gains is pretty meaningless against the backdrop of a real estate bubble waiting to pop and household debts that are at record levels.

      Here is a good interactive real estate chart to compare countries…
      http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

      The most revealing is house prices against rent or income. Almost every country except Canada has returned to long time averages. It’s a bubble waiting to pop.

      The Canadian $ has dropped dramatically in the last few months. Inflation will naturally increase and so will interest rates. A lot of people will see debt service costs rise dramatically in the next few years.

      It’s going to get ugly.

      • Agreed. I think the lower end of the real estate market will fare better, as between people looking for more affordable housing and an aging population the demand will still be there – more or less. But people buying monster homes will likely take a beating.

  2. Good article. But Wente doesn’t argue…she opines…and poorly most of the time too.

  3. Taken together, I find myself staked to a position outside either of the two camps described above. I don’t find it odd that young people have fewer assets than older people, but I also don’t think wealth gains driven by real estate price growth is worthy of much celebration.
    Bingo. It was a non-story spun into a story. Not the first time that’s happened.

  4. Most of this wealth is really just asset price inflation. Asset price inflation, just like consumer price inflation, doesn’t create wealth. It redistributes wealth. Consumer price inflation tends to redistribute wealth from consumers to producers, at least in the short term, until the producers can no longer keep their price increases out in front of their own escalating costs. Asset prices are a little less obvious, in that they seem to make everyone wealthier. But future generations will have to pay the inflated price (for land, houses, or shares in companies), meaning a generational wealth transfer. Or, there will be a massive correction, meaning the “wealth” will never be realized for most. Stock markets can crash with a thud. And as we’ve seen in the US and Ireland, so can housing. Worse than the correction in prices are the after effects, which can devastate entire economies.

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