Wealth inequality: Going from bad to (net) worth

David Macdonald, senior Economist with the Canadian Centre for Policy Alternatives, Rabble

This week, Statistics Canada released its 2012 wealth survey (Survey of Financial Security). Two previous wealth surveys were published in 2005 and 1999 with a similar methodology.

We often talk about income inequality, which examines what middle-class and rich Canadians make in a year. However, wealth inequality examines middle-class and rich Canadians’ net worth, including their house, RRSPs, savings, car, etc. If income inequality — where the top 20 per cent of families get 43 per cent of the income — is concerning, then wealth inequality should be downright shocking. The top 20 per cent of families in Canada own 67 per cent of all net wealth (although this is down slightly from the high of 69 per cent of all wealth in 2005).

Put another way, the top 20 per cent of families have twice as much wealth as the bottom 80 per cent of families combined. Even if the bottom 80 per cent of families doubled their net worth tomorrow, they still wouldn’t have as much as the top 20 per cent presently do.

Inequality is not only about the wealthy, it’s also about the middle class. Looking at the middle 20 per cent of families, while they represent 20 per cent of the population, they only receive 15 per cent of all income. However, the middle 20 per cent of families only have 8 per cent of all net wealth and this has remained fairly constant since 1999.

All the above examines the share of net worth, not its dollar value change over time. In fact, net wealth has increased for all quintiles since 1999. For instance, middle class net wealth has increased by almost 80 per cent since 1999 in inflation-adjusted terms. The upper class has increased their net worth by a little over 80 per cent since 1999. That seems fairly equal until you realize that the wealth they were starting from in 1999 was already incredibly unequal: 80 per cent of $760,000 is a lot more than 80 per cent of $137,000 (the 1999 median wealth values for the upper and middle classes, respectively).

In fact, of every new dollar of Canadian wealth created since 1999, $0.66 went to the richest, $0.23 went to the upper middle class and the bottom 60 per cent fought it out for the remaining dime.

The reasons why wealth increased for the middle class in contrast to the rich are also quite different. If we look at the distribution of debt instead of net wealth, we find that the middle class actually holds the most debt of any quintile, certainly more than the poor, but interestingly also more than the rich. The middle class has managed to increase their net wealth in large part due to increased leveraging, not asset price appreciation. The richest families have less debt and substantially more assets. Their increased wealth is largely due to asset accumulation, not leveraging.

Upon examination of the types of debt for the middle class, we find 80 per cent of it comes from mortgage debt. In fact, the majority of the middle class’ assets are also related to real estate (which is not the case for the upper class). For the middle class, increased net wealth has been related to much more expensive houses being purchased with much larger mortgages. That is to say, the middle class is leveraging up in order to keep up (with the Jones’).

As the Americans learned, leveraging up is only a successful strategy if housing prices continue to appreciate. When a house goes down in value, the mortgage payments do not. Asset prices fluctuate while debt levels do not, which is why over-leveraging is generally a bad idea, particularly when mortgage rates in Canada are at all-time lows.

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