It is not easy to say where to pin the blame. Is it media consumers who want more and more hot-takes on the terrors of inequality? Or is it journalists who expect that that’s what the public want?
Either way, we pretty quickly fall into what Timur Kuran and Cass Sunstein called an availability cascade: the plethora of stories about something generates demand for more stories about it.
A story about a dog attack cues people to be wary of dogs, which slightly increases demand for more stories about dog attacks. The underlying number of incidents might not have changed a whit but that is beside the point when the cascade gets moving.
The Household Economic Survey (HES) wealth data that came out a couple of weeks ago generated a lot of hot-takes in the next day’s newspapers, with opinion pieces coming out shortly after.
The headline had it that wealth inequality had grown, with the wealthiest 10% of individuals having a greater fraction of overall wealth. The story fed into a lot of existing narratives. Headlines about inequality have proven very popular. But, income data has stubbornly refused to bear things out.
Measured inequality in pre-tax wage income for individuals was flat from the early 1990s through the early 2000s and generally declined thereafter. Inequality in after-tax-and-transfer income for households, adjusting properly for household composition, has been flat or declining over the same period. And, inequality in similarly equivalised consumption was actually lower in 2013 than it was in 1984 – or at least if you, like me, trust Victoria University’s John Creedy and Treasury’s Chris Ball to sort this stuff out. You build wealth by increasing savings and savings is the difference between income and consumption. But asset price movements will matter, too, and both the stock market and house prices have moved a fair bit since last year’s Survey of Family, Income and Employment (SoFIE). So it was time to check the data tables. I found a bit of a puzzle.
The HES tables sort households into quintiles by net worth. The first has the 20% of households with the lowest household net worth; the fifth quintile has the top 20%. The tables list the assets and liabilities held by households in each quintile.
Households with less than $39,500 in net assets make up the bottom quintile. Collectively, those households own owner-occupied houses worth $3.99 billion, or $219,000 for the median household that owns the house they live in. The figure feels a bit low: are there really that many houses out there that are worth less than $220,000? But part-ownership of those houses could help make sense of it if parents putting down the deposit on the kids’ house gives them a stake in the ownership.
More puzzling was that, against that $3.99 billion in housing assets owned by the least wealthy 20%, were $4.899 billion in loans against owner-occupied residences. The last time I checked, banks needed to comply with 80% LVR ratios, not 123% ones. But even if there were no LVR considerations, what bank would lend multiples of the value of a house to the people in the least wealthy cohort? And so it was time to check the footnotes.
The notes tell us that assets held in a business or trust are not counted, unless they are mentioned.
It seems implausible that the least wealthy 20% of the population have put their houses into trusts but it could be a consideration in some cases.
If a family owns houses in a trust, and the 20-something living in it has just graduated from university and has taken over the mortgage, the mortgage liability could show up in the accounts but not the asset. But that story seems to fall apart when we look back to the median tables rather than the totals. Among those first quartile households reporting ownership of a house, the median house value is $219,000. But the median debt on owner-occupied housing, among those with mortgages in first quartile households is $240,000.
It does not make sense that the debt on the median house owned with debt is greater than the value of the median owned house in that quartile, unless the median home recently purchased by those in the bottom quartile is of substantially better quality than those that have been long owned by those in the bottom quartile. More plausible are problems caused by out-of-date valuations. Statistics New Zealand tells us that the valuations used in the HES are from government valuations which can be up to three years old. GVs are well behind actual house prices.
If you have just purchased a house, the liability ledger will accurately reflect the value of your mortgage but your house could be undervalued by 20-30% – or more if you bought in the right place in Auckland.
These measurement issues then mean that wealth held by the bottom quartile is probably strongly understated – as are the housing assets held by all other quartiles. It matters a lot more in the bottom quartile – it winds up having about a billion dollars more in total household liabilities than it has in total household assets. Counting education loans on the liabilities side of the ledger while not counting the value of the human capital it embodies also makes for problems. These loans loom large on the liabilities side for households in the first quartile but are mostly held by younger people with strong future earnings potential and good future upward mobility – not the cohort typically worried about in discussions of inequality.
Similarly, the value of New Zealand superannuation is not counted, though it dominates many real retirement portfolios. And even the implications of the housing boom may not be what you might think. The wealthiest quartile has a lot of non-housing assets. Consequently, if the value of all housing assets across all quartiles were increased by 30%, the share of net worth held by the richest 20% would drop from 69.3% to 66.5%. The increase in the value of housing assets held in the middle quartiles outweighs the increase enjoyed at the top.
The media hot- takes feed nicely into the hype cycles around inequality.
But did anyone even notice the tables have the poorest quartile owing a billion dollars more in housing debt than they own in houses? It is hardly hidden, and it obviously requires some more serious analysis than just pointing to whether some number has gone up or down.
Dr Eric Crampton is head of research at The New Zealand Initiative.