How do you know if you are wealthy? It’s not straightforward

Wealth is tricky to measure, comprising as it does a mix of assets from property to bank accounts to – for a few – art and yachts. New Irish data gives a fascinating insight into the wealth of households and how this has changed since the crash.

Wealth levels have recovered since the crash. However the distribution of wealth is unequal and young renters are among those with very little by way of assets.

1. The data

New Central Statistics Office (CSO) data published a few weeks ago calculates the median net wealth of Irish households as being €184,900.

This is 80 per cent up on the 2013 post-crash figure of €102,600. Rising house prices – and falling debt levels – are the main reason for the increase, though not the only one.

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The data is from a survey of households who are asked to list their assets and their debts – allowing a calculation of net wealth. The measure used is the median – this is the level at which the number of people holding more wealth is exactly the same as the number who hold less.

This means that the impact of a relatively small number of very wealthy people does not skew the figures, as it would if we calculated the average the usual way – by adding up all the wealth and then dividing by the number of people, getting the so-called mean average.

The CSO data, taking the mean, would put the average wealth level at €360,000 per household, a much higher figure. So we can see that there are some households with a large amount of wealth.

Also, it is worth noting that there is some evidence that better off households are loath to take part in wealth surveys and that households in general underestimate their financial assets.

2. The key trends:

The table gives a summary of the CSO findings, including the percentage holding different assets and the average (median) value of these. The graphic shows the assets held by a range of different groups – and there are big differences.

The big increase in household wealth since the crash relates largely to the increase in the value of the family home. The median value of the main household residence is €250,000 for 2018, the period to which the data refers, up by €100,000 since 2013.

Nearly seven in 10 households own their property, either fully or via a mortgage. Almost one-third of homes owned with a mortgage were in negative equity in 2013 versus fewer than 4 per cent in 2018.

A home is, of course, a different type of asset to, say, cash in the bank – for most it cannot be “cashed in”, though it is a vital part of inheritances. It is thus different in some respects from other kind of wealth.

Home ownership rates in the east and midlands region – at 64.2 per cent – are lower than the average – signs of the affordability crisis and also a larger group of renters.

In the south, the ownership figure is 75 per cent. But the median value of homes owned in the east and midlands is higher, at €346,000, versus €200,000 in the south and €160,000 in the north and west region.

The opposite applies to land holdings – separate from the land your house is on – with 4.3 per cent of households in the east and midlands owning land versus 15.7 per cent in the North and West.

And then there are other real estate holdings apart from the family home. Not surprisingly this is notably higher among the better off,with almost one in three of the top 20 per cent by income owning other real estate as well as the family home.

Overall, the family home accounts for 60 per cent of measured wealth and with other property assets accounting for 15 per cent, three-quarters of wealth holdings measured by the CSO come from property.

For wealthier households, the family home accounts for around one-third of total wealth – in other words they own much more by way of other assets. For most others in the middle of the wealth distribution, the family home accounts for 75 per cent plus of wealth.

More than nine out of 10 households own financial assets – savings, shares, a private pension and so on. The median value of these is relatively small, at €7,900. Most of this is accounted for by savings in the bank, with just one in ten households owning shares, mainly wealthier households.

One area which is difficult to measure is pensions wealth, with households asked by the CSO for “the current value of plans with an account balance, if known to the respondent.”

This means defined benefit pensions, such as those in the public sector, will not have been included, even though many are a very valuable asset.

The CSO data also shows a decline in debt levels in recent years, as households paid down loans and borrowing was slow to take off following the crash.

In terms of wealth distribution, the second graphic shows what you need to own to be in the wealthiest 10 per cent of households – around €835,000. Upwards of €500,000 in net wealth gets you in the top 20 per cent.

The poorest ten per cent have assets of just €1,000 on average – hardly any wealth or savings.

3. The other main wealth measure

As happens elsewhere in the EU, separate data is produced by the Central Bank. Rather than surveying households, it looks from the top down, measuring the total deposits held in banks, amounts owed to households by insurers, mortgages outstanding and so on.

It’s latest estimate was that household net worth reached a high of €800 billion in the third quarter of last year, which would be over €450,000 per household – or around €440,000 per household looking back to the end of 2018, comparable to the CSO data.

The graph shows the breakdown of assets as measured by the Central Bank and how the net worth total has moved.

There are a few reasons why the Central Bank figure is higher. First, remember that it is the mean average, so it comparable to the CSO’s €360,000 figure and not the lower median figure. Second, research by the Central Bank has shown that the CSO data tends to under-report deposits held in banks significantly – the total being around three times higher than the CSO figures.

This same trend is also seen internationally. Third, the Central Bank figures also include some smaller private companies and charities not included in the CSO figures. Fourth, the Central Bank data may capture insurance and pension entitlements a nit more fully.

Background work by the Central Bank highlights the role of property purchases – and prices – in household wealth movements. Household wealth peaked at an average of €477,000 in 2007 and fell to €258,000 in 2013 as property prices crashed.

With an increasing number of households now, average wealth is probably still just below its 2007 peak. A big factor has been the fall in debts and the debt burden related to income shown in the final graphic.

4. What it all means:

The wealth data has some wider implications for society and policy.

– The first is that house purchases, via a mortgage, has been the traditional method of accumulating wealth, providing a buffer in old age and a way to help the next generation. If people can’t get buy in the first place, this link is broken. As Central Bank economists and Faris Bader and Cormac O’Sullivan pointed out in a “behind the data” publication last year, while average wealth is now approaching its previous peak, there are differences now. One in every 17 mortgages is still in arrears over 90 days, for example, a traditional sign of distress.

They write: “In addition, increases (or decreases) in wealth arising from house prices changes may accrue to a narrower group in the future, as home ownership has decreased slightly in recent years. Home ownership across most age groups has declined since 2011, with the decline particularly noticeable in the younger cohorts.”

– The sharp difference in net wealth between owners and renters is evident from the CSO data. Median net wealth of owner occupiers is €253,500 versus €21,500 for renters. Part of this relates to age – median wealth in households where the main earner/former earner was 65 or older is €253,500, falling to €21,500 for those where the main earner is under 35.

However if the current younger age group can’t buy, the traditional route to owning a valuable asset is closed off. And many may not yet have pension provision, another key long-term factor.

– Other groups with low net wealth include one parent families and a group living in urban areas (where both those with the highest and lowest wealth levels tend to live). In many cases these groups also have low incomes.

– Debt levels have fallen sharply in recent years as households have paid off loans and new borrowing was slow to take off.

The Central Bank researchers pointed out that in the five years to 2007, household debt trebled. It has since fallen sharply and debt measured as a proportion of income, or of asset values, is now back to around 2003 levels. However, household debt at 115 per cent of income is still at the higher end of the EU average.

– The distribution of wealth is always a contentious subject. And it is hard to measure. The CSO data does not give a breakdown of wealth ownership – a 2015 analysis by economist Cormac Staunton on behalf of TASC estimated that more than 70 per cent of wealth was owned by 20 per cent of the population, which would be slightly ahead of EU averages. The latest CSO data estimates that wealth inequality has decreased a little in the meantime, though it does not present detail of wealth concentration.

– In terms of taxation, two parties – Sinn Féin and the Green Party both proposed wealth taxes in their election manifestos. But taxing the the family home remains contentious. Sinn Féin remains opposed to the local property tax and Fine Gael and Fianna Fáil have promised not to hike this tax.

Better off households are much more likely to have had a significant inheritance. Sinn Féin has called for a hike in inheritance tax while Fianna Fáil has called for a cut for children inheriting from parents.