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- The report finds that real estate accounted for two-thirds of net worth in 2020
- The report also notes that assets rose from $440 trillion (or about 13.2 times GDP) in 2000 to $1,540 trillion in 2020
- While households in Germany, Mexico, France and Australia largely held buildings and land, in the US it was equity and pensions that made up the bulk of household wealth
China has usurped the United States to become the wealthiest nation in the world with global wealth rising three-fold in the last two decades. These are the two headline takeouts of a newly published report by the research arm of McKinsey & Co titled, ‘The rise and rise of the global balance sheet: How productively are we using our wealth.’
The report, which examines the national balance sheets of 10 countries that account for roughly 60 per cent of global GDP – Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the UK and the US – concludes that the historic link between the growth of net worth and GDP growth no longer holds in the 21st century.
- “While economic growth has been tepid over the past two decades in advanced economies, balance sheets and net worth that have long tracked it have tripled in size. This divergence emerged as asset prices rose- but not as a result of 21st-century trends like the digitisation of the economy,” the report notes.
- The report finds that real estate accounted for two-thirds of net worth in 2020. Meanwhile, other fixed assets responsible for driving economic growth comprised just 20 per cent of the total. Asset values are “now nearly 50 per cent higher than the long-run average relative to income. And for every $1 in net new investment over the past 20 years, overall liabilities have grown by almost $4, of which about $2 is debt,” the report reads.
- The worldwide net worth has now risen to $514 trillion in 2020, up from $156 trillion in 2000. In that period, China’s wealth has surged from just $7 trillion in 2000 to a staggering $120 trillion. Meanwhile, the US’ net worth has more than doubled in that timeframe to $90 trillion. Muted property prices, the report notes, were responsible for the US now lagging behind China.
- The report also notes that assets rose from $440 trillion (or about 13.2 times GDP) in 2000 to $1,540 trillion in 2020. “Average per capita net worth was $66,000, but large variations exist across economies, and even more so across households within an economy,” the report adds. “In the countries in our sample, per capita net worth ranged from $46,000 in Mexico to $351,000 in Australia. Net worth ranged from 4.3 times GDP in the United States to 8.2 times GDP in China.”
- The report also found that within the household sectors, the top 10 per cent of households in both, China and the United States held roughly two-thirds of all wealth. The wealth of the US’ top 10 per cent of households grew from 67 per cent in 2000 to 71 per cent in 2019. In that period, the bottom 50 per cent of wealth owners’ share fell from 1.8 per cent in 2000 to 1.5 per cent in 2019. A similar trend was observed in China with its top 10 per cent of households accounting for 67 per cent of total wealth in 2015, compared to 48 per cent in 2000. The bottom 50 per cent of Chinese households held 14 per cent of wealth in 2000 and only 6 per cent in 2015.
- The distribution of assets also varied significantly across the countries examined. While households in Germany, Mexico, France and Australia largely held buildings and land, in the US it was equity and pensions that made up the bulk of household wealth. In Japan, “deposits account for more than one-third of total household assets,” the report found.
- “The value of residential real estate including land amounted to 46 per cent of global net worth in 2020, with corporate and government buildings and the land associated with them accounting for an additional 23 per cent. Other fixed assets like infrastructure, industrial structures, machinery and equipment, intangibles and mineral reserves – the types of assets that typically drive economic growth – made up only one-fifth of real assets or net worth, ranging from 15 per cent in the United Kingdom and France to 39 per cent in Japan,” read the report.
- The report also found that real asset valuation had increased over the last two decades while interest rates fell and operating returns stagnated or declined. “This created a rationale for investors to prioritise potential asset price increases over real economic investment in and improvement of operating assets,” the report noted.
The sharp rise in property prices, coupled with declining interest rates, led the McKinsey researchers to raise concerns over the sustainability of the wealth boom. Speaking to Bloomberg, Jan Mischke, one of the authors of the report drew attention to the rising real estate prices, saying “Net worth via price increases above and beyond inflation is questionable in so many ways. It comes with all kinds of side effects.”
The report speculated that, with high real estate rates pricing many out of the market, the risk of a financial crisis witnessed in 2008 in the wake of the housing bubble bursting persisted since many may be forced to borrow exorbitantly to finance housing purchases. More recent trends in China’s real estate market characterised by several major property developers defaulting was another example of how rising property prices could derail an economy.