The Collection 02
Creative Commons License photo credit: VOD Cars

Credit Suisse’s Global Wealth Report 2011 offers fascinating insights – particularly for Australia. The nature and spread of our wealth is strikingly – astonishingly – different to every other country.

Owning net assets (after deducting all debt) of more than USD 100,000 puts an individual in the global top ten per cent. Any Australian on reasonable earnings can realistically aspire to join the club and seventy per cent of all adults make the grade.

Owners of net assets of USD 880,000 can preen themselves: they stand among the great and good, the global top one per cent. And many, many Australians have been lifted into the top one per cent by a combination of booming house prices, compulsory superannuation and the rising Australian dollar.

“The richest nations… are topped by Switzerland, the first and only country to register wealth per adult in excess of USD 500,000. Australia and Norway also have average wealth above USD 300,000.

“Interestingly, the ranking by median wealth is slightly different, favoring countries with lower levels of wealth inequality. Australia (USD 222,000) now tops the league by a considerable margin.

“Compared to the rest of the world, very few Australians have net worth less than USD 1,000. This reflects such factors as relatively low credit card and student loan debt. The proportion of those with wealth above USD 100,000 is the highest of any country – eight times the world average. With 1,861,000 people in the top 1%, Australia accounts for 4.1% of the members of that wealthy group, despite having just 0.4% of the world’s population.

So, Australia is ranked equal second in wealth per person and first – by a long way – on wealth equality.

But before you order a Ferrari and that new billiard table, look at the character of our wealth: it is overwhelmingly in land.

“… at just 0.53, the financial to non-financial ratio in Australia is below the average even for emerging markets. This reflects a sparsely populated country with a large endowment of land and natural resources, but also high urban real estate prices.

The alarm bells are now going off in my head.

“The experience of Japan provides a salutory lesson in allowing real estate prices to run out of control. The explosive growth from 1984 to 1990 has been followed by declining property prices for three decades, reducing the real assets-income ratio from 6.5 at its peak in 1990 to 3.5 in 2008. This reversal in fortune has been so pronounced that Japan is now on a par with Canada, and ranks below eery other G7 country except the USA. Based on the Japanese experience, toleration of housing booms in Britain, France and Italy (AND AUSTRALIA!) seems reckless in comparison to the slow and steady progress of Canada and Germany.

It is those high urban real estate prices again.

Of Australia’s 6 trillion in net assets, 3.5 trillion is land. You will be aware Prosper forecasts land prices will halve over six years. The ABS has reported an 8.7 per cent fall in property prices from the peak a year ago.

The currently deflating land bubble will erase wealth with dazzling speed. Sadly, striking falls in land values will have a greater impact on Australian wealth than any other advanced country. The hefty mortgages supported by current prices remain fixed in place, and the banks will expect to collect in full.

We are fans of a universal Land Value Tax and the original Resource Super Profits Tax – plus the removal of 125 vile taxes that distort behavior, are easily evaded and costly to administer.

Given the national obsession with land, instituting an LVT ought be hardest here; on the other hand, to do so would have the greatest impact on the composition of aggregate demand of any country. In other words, Australia has the most to gain from LVT and RSPT.

Embracing the reform agenda in Australia’s Future Tax System would reward effort and make us even wealthier. Dr Ken Henry ain’t silly.