In terms of wealth, Australia is now less equal than ever before, and whether that continues will depend on young peoples’ access to the housing market
The latest figures on household incomes show that over the past two years income inequality has increased. However, income is only part of the issue.
The figures also show that wealth inequality has increased such that (in terms of wealth) Australia is now less equal than ever before.
As a general rule, wealth is less equally distributed across households than is income. This is not surprising when you consider that income is subject to taxes and can be apportioned via government benefits. Wealth, on the other hand, is rather less flexible, and it also accumulates.
While having a high income one year will give you are pretty good chance of having a high income the next year, the odds are much better that wealth this year will lead to more wealth next year.
When we look at the split of income and wealth across households, the difference in equality is quite stark.
The poorest 20% of households by income hold 7.5% of total household income, but the poorest 20% of households by net worth (or wealth) hold just 1.1% of total household wealth:
To an extent this is a concern, but concerns about wealth are slightly different from concerns about income. A big factor in wealth accumulation is age, and there is not a lot anyone can do to alter that fact.
The reality is you are much more likely to have accumulated more assets – property, vehicles, superannuation – purely by being in your 50s as opposed to your 20s – even if a person in his or her 50s is earning the same as a person in his or her 20s.
The average age of the head of a household in the poorest 20% of wealth households is 41, but by income it is 58 – highlighting that a retired person may have a low income but a relatively high amount of wealth:
Such aspects always bring with them concerns regarding “asset-rich but income-poor” retirees who are receiving government benefits.
And while such households do exists, the reality is that being income-rich is much more likely to also see you as asset-rich.
A quarter of households in the bottom 10% of wealth come from the poorest 10% income households. Similarly, 35% of the wealthiest 10% of households are from the richest 10% of households when ranked by income:
And when we look at government benefits, there is little doubt that they are extremely well targeted according to income, 53% of the poorest households getting over 90% of their income from government benefits. By contrast, 90% of the richest households get none or less than 1% of their income from such benefits:
But according to wealth, the distribution is less targeted.
While only 5% of median income households get more than half of their income from government benefits, 32% of median wealth households do so:
The major reason for this is the reason for most people’s wealth – owning a house. Across every income range, the family home is the greatest asset – well in front of other financial holdings, including superannuation:
But while the average value of that home for the poorest households is 75% that of the median income household, because the average age of the poorest households is around 10 years older than that of median households, much more of their home loan has been paid off.
Thus, the average principle left on a home loan for the poorest income households is a mere 33% of the average $81,000 owed by median income households on their loan:
And when we combine assets and liabilities, we again see that the richest by incomes also, on average, will be the richest by wealth (and vice versa):
But we shouldn’t fall into the trap of thinking the poorest income households are all retirees living in their own homes with little mortgage left to repay.
The poorest 20% of households have the highest level of renters across the income spectrum. Similarly, the richest 20% has the highest level of households either owning their house outright or paying off a mortgage:
As we saw last week, income equality has grown over the past two years, and while government benefits have not been able to counter the income growth of the richest 20%, they remain clearly well-targeted. But given the importance of the family home in producing household wealth, housing affordability will be the biggest issue in the years ahead.
While wealth accumulates with age, if younger Australians are unable to enter the housing market as did previous generations, wealth inequality will continue to grow.