Rich are getting richer, others are being left behind – Central Bank study finds

A study published by the Central Bank of Malta on Friday has confirmed what many already suspect: that the rich are getting richer, while the poor and elderly are left behind in spite of the government’s frequent boasts of economic success.

A study published in the Central Bank’s Quarterly Review has begun lifting the lid on households’ economic situations, and the picture is not nearly as rosy as it is made out to be.

The study, which gauges wealth and income inequality in Malta, has found rising inequality between the rich and the poor since 2010. And while the results are concerning, even more worrying is the fact that the study only covers up to 2016, meaning three more years of potential inequality still to be accounted for in future analyses.

Over the last two years, homelessness in Malta has been growing, while the rising cost of

living and lower wages are leaving the country’s population worse off than their European peers.

The Central Bank of Malta’s study has found “rising inequality” among those within the lower half of Malta’s wealth distribution since 2010.

It has also found decreasing inequality among the upper half of the country’s wealth distribution.

While wealth inequality is more pronounced than income inequality, wealth inequality increased between 2010 and 2016 and widened at a quicker pace than income inequality.

On the whole, and in relative terms, the distribution of wealth and income changed over the period under consideration in favour of households in the upper tiers of the country’s wealth and income distributions. Older households, for example, have seen stable pension income but have been increasingly unable to keep up with the overall increase in the national median income, meaning they are being left behind.

The financing structure of households, according to the Central Bank, and in particular their ability to take out a mortgage for their main residence, “plays a crucial role in explaining its position in the wealth distribution.”

Furthermore, the study finds, “household income and the incidence of having received inheritance or gifts are among the most important determining factors of a household’s position in the wealth distribution.”

The study notes how the Maltese economy has undergone a strong and job-rich expansion in recent years, leading to higher household incomes, historically low unemployment rates and a booming property market.

But, in many countries, the CMB observes that such episodes have frequently been characterised by rising inequality, as some categories of households were not in a position to benefit from such an expansion, with the latter losing out in relative or, in some cases, even in absolute terms.

The bank inspected the situation through data from the Household Finance and Consumption Survey and other data sets using common inequality measures such as gross household income, net wealth, real assets, financial assets and liabilities.

The results show that financial assets are the most unequally distributed of these measures in Malta, and that their distribution basis has become more and more unequal over time.

The finding is partly supported by other measures of inequality, such as the P-ratios, which represent ratios between different percentiles of the distribution; although in these cases the development is not linear over time.

In 2016, households at the top of the income distribution earned 2.31 times more than those at the median of the distribution, down from 2.38 in 2010. Concurrently, households in the middle-to-upper parts of the distributions saw higher income increases relative to lower income groups.

Households’ liabilities have also skyrocketed since 2010, from an average of €17,122 to €40,000 in 2016, mainly due to the “increasing availability of housing loans to households, particularly to those around the middle of the distribution of liabilities since 2010.”

As far as net wealth is concerned, the divergence within the top half of the distribution became less pronounced over time, indicating that the net wealth of the middle 50 per cent exerts more weight on the distribution.

The bank notes how real assets are more equally distributed than financial assets, partly due to the prevalence of homeownership in Malta, which, the bank says, “might also explain why net wealth is more equally distributed than financial assets.”

However, inequality in the bottom half of the distribution has increased over time, in fact more than the other relative measures of inequality considered in the study, which, the bank found, “may reflect the fact that households at the lower end of the distribution may still find it challenging to acquire real assets.”

A large gap has been noted between the income level of older households (65+) and that of younger ones. And since 2010 this gap has increased with the 65+ category being the only category that did not experience an increase in income.

“This,” the bank postulated, “suggests that old age pensions have lost their relativity with median income. Moreover, old age pensions have only increased in line with the cost of living during the period under review, while they are also subject to a cap on pensionable income.”

In Malta, median net wealth rises steadily with age, reaching its peak on average in the 45-54 age group.

But households whose reference person, the main inhabitant who takes care of finances, is over 65 years of age, experienced a marked increase in their net wealth in the period under review.

This, the bank said, “is related to a higher self-assessed value of their housing wealth as well as due to an increase in the perceived value of financial assets over time.”

Conversely, the net wealth of households in the 16-34 group remained more or less stable over time, as their increases in income were offset by a decrease in their financial assets coupled with a “notable increase in their debt holdings by 2016.”

As regards labour status, households with a self-employed reference person are more likely to be in a higher wealth quintile (compared to households with an employed breadwinner) because they hold high value assets. The effect of household size, meanwhile, was found to be “ambiguous and statistically insignificant” as it could be attributed to similar household structures across similar wealth quintiles. A tertiary level of education was also found to have had a positive impact on wealth distribution.

For households who own their homes with an outstanding mortgage, there is a positive and significant impact on the probability that a household would be in a higher quintile in the wealth distribution, except for the highest wealth quintile.

“Therefore, households that can save up enough money to partly or fully finance the purchase of a house have a high probability of being in the wealthiest quintiles in the future,” the Bank found.

That, according to the bank, is also because, “households with a mortgage typically have higher (expected) incomes and therefore represent a lower risk to financial institutions” and therefore qualify easier for mortgages.

Credit-constrained households in the first wealth quintile (the lowest), however, are found to be negatively affected by a lack of credit availability.