Issues in the measurement of wealth

Anne Harrison

Towards official balance sheet estimates for South Africa’s

household sector

Janine Aron, John Muellbauer and Johan Prinsloo

Congratulations!

• Of interest to both macro and micro

• Academic - govt official estimates

• Technical – pragmatic

• Emerging country study – with lessons for some more advanced countries

Outline of paper

• Why is this interesting?

• How did we do it?

• How could the work be improved?

• Analysis of the results

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%

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

Builds on

• Earlier work by Aron and Mullbauer

• Data from quarterly bulletin of SARB

• Money and banking stats and NA

• Methodology of UK ONS

Non-financial assets

• Housing – land is one third of value of housing on it

• Other buildings – land about 14%

• Other fixed assets - small

1975 1990 2003

Housing 18.6 136.9 617.2

Other 17.4 82.6 181.6

Total 36.0 219.5 798.8

Financial assets & liabilites

• Deposits –funds offshore illegally

• Pensions

• Equity

• Mortgages

• Consumer credit– Loans – micro finance

Pensions

• Assets of pension funds or liabilities to pensioners?

• Increase in household wealth or reduction of under-funding?

• Hgl or defined benefit schemes?

Possibly..

• increase in household wealth may be overstated

• decline in wealth to income ratio may be understated

Consolidation

• direct investment in shares

• indirect via unit trusts (mutuals) or pensions

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?

Trends in assets /liabilites

• Income increases

• Spending increases faster

• Additions to wealth are slower

• What about unearned component?

• Liabilities increase with financial liberalisation

Basic story

• increase in housing

• increase in pensions assets at cost of more direct investment

Conclusion

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

What else?

• Pensions and housing dominate wealth

• Could these two only be analysed by quintile?

Housing wealth in Finland

Sami Niemaläinen

Taru Sandström

Markku Säylä

Veli-Matti Törmälehto

Applause

• Openly examines discrepancies between micro and macro data

• Shows many of these are due to conceptual differences

• Examines how to reconcile these

Outline of paper

• Why is this interesting?

• How did we do it?

• How could it be improved?

Three sources

• ”National accounts”

• Financial accounts

• Household wealth survey

National accounts

• All dwellings

• Not land underneath

• Cumulates from past data

• Sales of existing houses not tracked

• Repairs and maintenance

Nice quote

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

Financial accounts

• Includes buildings and land

• Floor area times market price

• May exclude garages etc.

• Difficult to identify owners

Household wealth survey

• Does not include institutional households

• Deceased persons

• (NPISH)

• Self-valuation

All houses available All buildings owned by households

Houses owned and occupied by households

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

What do we have?

NA FA HWS

Dwellings x x x

Free-time houses x x

Land x x

Free-time houses x

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

Recommendations

• Define household wealth

• Reconcile NA and FA (and HWS)

What about..

• Free-time (holiday) houses?

• Houses owned abroad?

• Houses owned by non-residents?

• (South Africa also)

Why do we buy houses?

• Because they are a ”good investment”

• May buy larger than really need

• May buy to let

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

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