South African wealth growing at snail's pace
A recent Household Wealth study completed by the South African Reserve Bank indicates that while household net wealth in the country is increasing, the pace of the growth is nothing to write home about. The first study of this type was published as a supplement to the Reserve Bank Quarterly Bulletin, with an update released in the Reserve Bank's 2007 Annual Economic Report last week.
The latest report reveals that at June 2007 the average South African household's net wealth rose to 298% of disposable income. Household net wealth is defined as the difference between total household assets and household debt expressed as a percentage of disposable income. So, for example, an individual who owns a home worth R1.3 million, a share portfolio worth R150, 000, has a mortgage bond of R900, 000 and other debts totalling R50, 000 would have a net wealth of R500, 000 (total assets less total debts). If this individual's after-tax salary amounted to R200, 000 per year, his household net wealth would be 250%.
A big thank you to house and equity prices
The Reserve Bank notes that "buoyant consumer spending throughout 2006 was boosted by an exceptionally high level of consumer confidence." And one does not have to look too far to find the economic conditions that underpin this confidence. It is "supported by rising employment and real disposable income as well as an increase in household wealth, inspired by buoyant real estate values and share prices." Although there is always room for error in statistical analysis it is interesting to look at the change in the makeup of the average household balance sheet over the last 15 years. We will consider the two items mentioned as the main underpin of consumer confidence.
In 1990, residential buildings accounted for 21.6% of the total. This amount declined over the next decade to 18.8% in 2000. But in the first six years of the 21st century house prices shot the lights out. And the contribution of real estate to the household balance sheets surged to 25.1%.
Equities (shares) showed similar resilience. The percentage contribution of shares to the household balance sheet rose gently from 19.9% in 1990 to 23.2% in 2000. But then domestic equity markets entered what might become the longest bull market rally in South African history. At the end of 2006, equities contributed 32.7% to the average household balance sheet.
Pity the US overachievers
While South Africans trumpet their small jump in net wealth, the latest Forbes list of wealthy people in the US makes frightening reading. The list reveals that a net asset value of less than USD 1 billion no longer warrants a mention. There are no less than 29 individuals and families worth R1 billion and sharing the 891st ranking on the list.
A quick look at the top of the list reveals the usual suspect, Bill Gates (of Microsoft fame) worth around USD 59 billion. The US top ten includes five information technology company founders, two oil magnates, two casino and hotel operators and one investment guru.
It was interesting to note that one of the new entrants to the list was a money manager who made more than a billion dollars shorting the US sub-prime market, proving there is money to be made from financial adversity too.
Why more wealth is not always a good thing
You can be excused for thinking that an increase in net wealth is a good thing. Unfortunately developments in the world of economics are not that cut and dried. The reason is the Reserve Bank sets interest rates in the domestic economy and one of the items they watch with interest is money supply.
Their 2007 Annual Report makes numerous references to the link between rising wealth and rising money supply. "An important reason for the robust growth in M3 [money supply] was the strong increases in income and expenditure. At the same time, wealth effects emanating from rising prices of financial and non-financial assets also supported growth in money supply." Growth in money supply creates inflationary pressures in the economy and ups the possibility of rising interest rates.
We don't have long to wait before the next Monetary Policy Committee meeting determines whether interest rates are hiked, lowered or left unchanged. Analysts take a mixed view at the moment; with some saying a hike is inevitable and the reset that things will remain the same.
It seems the only certainty is that rates will not be going down!
Editor's thoughts:
As any hardened share trader will tell you, the profit or loss on a share transaction is not realised until the shares are sold. In much the same way, the value attached to a house is notional until the asset is sold and the proceeds received. In a crisis, homeowners soon realise that houses are relatively illiquid (difficult to sell) and that the value realised from a forced sale depends largely on where the property market cycle. Do we place too much faith in the value of our primary residence in determining our net worth? Send your comments to [email protected]
