Issues in the measurement of wealth

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Issues in the measurement of wealth

• Anne Harrison

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Towards official balance sheet estimates for
South Africas household sector

• Janine Aron, John Muellbauer and Johan Prinsloo

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Congratulations!

• Of interest to both macro and micro
• Academic - govt official estimates
• Technical pragmatic
• Emerging country study with lessons for some
  more advanced countries

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Outline of paper

• Why is this interesting?
• How did we do it?
• How could the work be improved?
• Analysis of the results

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1990 to 2003

• Household consumption relative to GDP up from 56
  to 65
• Gross saving to GDP down from 24.4 to 16
• Gross saving of households down from 6.5 to 3.5

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Aim

• ..to draw lessons for emerging market countries
  from South Africa, not only in terms of how to
  create balance sheets, but also of how the liquid
  and illiquid asset composition can alter over
  time as markets deepen

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Builds on

• Earlier work by Aron and Mullbauer
• Data from quarterly bulletin of SARB
• Money and banking stats and NA
• Methodology of UK ONS

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Non-financial assets

• Housing land is one third of value of housing
  on it
• Other buildings land about 14
• Other fixed assets - small

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1975 1990 2003
Housing 18.6 136.9 617.2
Other 17.4 82.6 181.6
Total 36.0 219.5 798.8
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Financial assets liabilites

• Deposits funds offshore illegally
• Pensions
• Equity
• Mortgages
• Consumer credit
• Loans micro finance

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Pensions

• Assets of pension funds or liabilities to
  pensioners?
• Increase in household wealth or reduction of
  under-funding?
• Hgl or defined benefit schemes?

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Possibly..

• increase in household wealth may be overstated
• decline in wealth to income ratio may be
  understated

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Consolidation

• direct investment in shares
• indirect via unit trusts (mutuals) or pensions

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But masks..

• household attitude to risk
• functioning of financial markets
• would hamper extension to other sectors
• regrettable for micro finance
• is there a lesson here for UK?

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Trends in assets /liabilites

• Income increases
• Spending increases faster
• Additions to wealth are slower
• What about unearned component?
• Liabilities increase with financial liberalisation

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Basic story

• increase in housing
• increase in pensions assets at cost of more
  direct investment

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Conclusion

• lack of balance sheet data for households hampers
  effective assessment of household consumption
  behaviour and how countrys national wealth is
  managed

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What else?

• Pensions and housing dominate wealth
• Could these two only be analysed by quintile?

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Housing wealth in Finland

• Sami Niemaläinen
• Taru Sandström
• Markku Säylä
• Veli-Matti Törmälehto

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Applause

• Openly examines discrepancies between micro and
  macro data
• Shows many of these are due to conceptual
  differences
• Examines how to reconcile these

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Outline of paper

• Why is this interesting?
• How did we do it?
• How could it be improved?

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Three sources

• National accounts
• Financial accounts
• Household wealth survey

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National accounts

• All dwellings
• Not land underneath
• Cumulates from past data
• Sales of existing houses not tracked
• Repairs and maintenance

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Nice quote

• The needs of statistics are not ranked top in the
  priority lists of municipal authorities

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Financial accounts

• Includes buildings and land
• Floor area times market price
• May exclude garages etc.
• Difficult to identify owners

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Household wealth survey

• Does not include institutional households
• Deceased persons
• (NPISH)
• Self-valuation

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Houses owned and occupied by households
All houses available
All buildings owned by households
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What do we want?

• NA - estimates of rent on dwellings
• - estimates of income from housing
• - estimates of depreciation
• FA - estimates of wealth
• HSW estimates of household wealth

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What do we have?
NA FA HWS
Dwellings x x x
Free-time houses x x
Land x x
Free-time houses x
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Results

• Despite all reservations on comparisons, can make
  reasonable assesment (figure 6, page 28)
• NA figures look rather low
• HWS highest (optimism on house prices?)
• FA not far short of HWS

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Recommendations

• Define household wealth
• Reconcile NA and FA (and HWS)

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What about..

• Free-time (holiday) houses?
• Houses owned abroad?
• Houses owned by non-residents?
• (South Africa also)

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Why do we buy houses?

• Because they are a good investment
• May buy larger than really need
• May buy to let

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Questions

• Do houses prices vary or only locations, ie price
  of underlying land?
• Do houses meet needs only or represent deliberate
  investment decisions?
• Life length and maintenance

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Housing

• Fertile field for continuing exploration on both
  micro and macro side
• Financial aspects should not be overlooked
• Houses may be used as pension equity
• Wealth aspects as important as flows