Building wealth through property possible not just for the rich
New figures from the Australian Bureau of Statistics show that Australia’s richest households are expanding their wealth three times faster than the poorest groups.
And if there was any doubt in your mind of the value of property as a creator of wealth, the figures clearly reveal a substantial amount of Australia's wealth is tied up in home ownership.
Melbourne households are (on average) the richest in the nation, followed by Perth, Canberra and then Sydney, which has been knocked off its perch as home to more wealthy Australian families.
With protests against “greed” going on around the world these findings are timely, so let’s first look at how the rich are getting richer and then I’d like to share some of my thoughts about the importance of money and its relationship to true wealth.
Mind the gap
Across the country, the average value of household assets in 2009-10 was $907,500, while debts owed were $135,700. This put average net worth at $771,800, up from $591,000.
Digging deeper into these figures revealed the rich experienced a far more rapid increase in wealth than the poor.
The wealthiest 20% of households had an average net worth of $2.23 million in June 2010, up $300,000 or 15 per cent from 2005-06.
The middle class is also doing better, with average household wealth up 14% to $720,000.
On the other hand, the ABS stats reveal the lowest 20% of households account for just 1% of total household wealth and had an average net worth of $32,000, up about $1,000 or 4%.
Not surprisingly the family home was the biggest contributor to household wealth.
About 2.7 million households owned their home outright, with an average value of $541,000. For those with a mortgage, the average house value was $521,000 with an average mortgage of $188,000.
For households with superannuation, the average value of their superannuation was $154,000, but for half of these, the value was less than $60,000.
Where our rich live
Household wealth was more concentrated in metropolitan areas. The average net worth of households located in capital cities was $772,000 as compared with $629,000 in areas outside of capital cities.
Melbourne households were the wealthiest, with net worth of $866,000. In Perth households had an average net worth of $853,400; Canberra - $843,370; Brisbane - $665,800; Darwin - $629,600; Hobart - $605,000 and Adelaide - $572,400
The average Sydney household had a net worth of $766,700 in 2009-10, up from $697,200. For the first time since the survey began in 2003-04, this was less than the national average of $771,800, and behind other capital cities.
This can be explained by the poor performance of the average Sydney house price over that time. While the average value of owner-occupied housing in Sydney rose by about $50,000, the increase was more than $100,000 in Melbourne and about $150,000 in Perth.
The importance of home ownership
It should come as no surprise that owner-occupied homes were the main asset held by Australians.
While the number of Australians that own their home outright fell slightly to 32.6%, the ABS data confirms a “strong correlation” between net worth and home ownership, with mortgage-free households being almost two-thirds wealthier than the rest.
There's no question that these figures reveal a substantial amount of Australia's wealth is tied up in home ownership and this this has led a number of groups to argue about the inequality of our “system”, including the lack of capital gains tax on our homes.
Isn’t this uneven distribution of wealth unfair?
I know that currently there are protests around the world about the uneven distribution of wealth and how the greed of various companies and even some countries has got the world into a financial mess.
These people have some valid arguments and as you’ve taken the time to read some of my views on wealth through property, I’d like to share some of my philosophies on money and wealth for what they are worth.
Firstly let me set the record straight – money is important. It helps you get through life, but money doesn’t equate to wealth.
Money is important in those parts of your life where it works (like paying the bills) and is not at all important in those areas where it is not essential.
To be truly wealthy you need a lot more than money.
Let’s face it, to be prosperous you need things like family and friends, health, time to appreciate your life, personal growth, spirituality (which means different things to different people) and very importantly contribution.
In my mind contribution back to the society that has helped you become wealthy is critical.
Rich people are not necessarily greedy, as some believe. Have a look at the ultra-rich – Warren Buffet has donated the vast majority of his wealth back to society, as has Bill Gates. And there are many examples of generous, philanthropic people much closer to home.
One more thing: wealthy people recognise that it’s not an either /or equation.
They can be rich and happy. They can be rich and generous. They can be rich and good people, while others believe they have to choose between money and other aspects of life. Therefore they’ve rationalised a position that money is not as important as other things.
Let me ask you a question.
Just because I own an investment property, that doesn’t stop you from owning one – does it? There’s enough of everything to round in this lucky country we live in.
Rich people live in a world of abundance, while the poor tend to see limitations.
My own observation is that many of those protesting about the distribution of wealth look at other people’s success with resentment. Some are even a little jealous. Others seem to believe that the rich people make them poor.
The problem is that if you resent what other people have, you can never have it!
If you view rich people as “bad” and you want to be a “good” person, then you can never be rich. How can you become something you deride?
I can understand why some may think all of this is “unfair” but they should remember that currently over two-thirds of households own their own home either outright or with a mortgage.
The fact is that when these Australians bought their homes prices seemed expensive to them. However they were disciplined in their spending and saved up a deposit, took on the financial commitment of a home and allowed the magic of compounding, leverage and time to grow their wealth.
The bottom line
If you want to grow your financial wealth you need to get a foot on the property ladder.
Yes the economic times are uncertain at present, and you can’t just buy any property and become rich.
In fact in turbulent times like we’re now experiencing fewer investors will do well, but those who buy the right properties in the right locations and finance than correctly will grow their wealth just like all those millions of other Australians have done before them.
Remember, as a long-term investor, and that's the only way to look at property as an investor, you can buy a property at any time in the property cycle as long as the fundamentals of the deal are sound.
This year may be a good time to buy property – I have always found it a good time to buy when everybody tells you that property is a bad investment. Now is the time to get set for the future.
Michael Yardney is a director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Investment Update blog.