Those who own far better off than those who rent
In the United States more than almost anywhere else, wealth and income are concentrated among business owners and landlords. And that club, blessed by capitalism, is becoming increasingly difficult to join.
Business owners and landlords tend to be about four times as wealthy as the average American. That’s more than almost any other country included in a new study. On the other end of the spectrum, renters in the United States tend to have about an eighth as much wealth as the average American.
In a recent paper, Austrian economists Pirmin Fessler and Martin Schürz used a long-running U.S. wealth survey and its newer European counterpart to compare wealth across continents. It’s one of the first such comparisons to look at wealth in terms of what people use it for, rather than at arbitrary percentile cutoff points. The widest inequalities, they find, are between groups inside countries and not across borders.
In their analysis, they split households into three groups. Homeowners, whose primary wealth is also their primary residence, form the bulk of the middle and upper-middle class. Business owners and landlords (about 15 percent of U.S. households), tend to be among the wealthiest. Their wealth is typically used to generate additional income. Those who pay to rent their residences (about 35 percent of households), and whose wealth is typically used to cover needs such as emergency expenses or retirement, fill out the bottom of the spectrum. They’re joined by homeowners and business owners whose debt exceeds their equity.
The bottom 40 percent are most likely to be renters. The top 5 percent are most likely to own businesses or rental properties. The authors found this polarization has increased since 1962.
In every country Fessler and Schürz studied, homeowners’ wealth hovers near the national average. The biggest gaps are between those who own businesses and rental properties and their customers and tenants.
In terms of wealth, that gap is widest in the United States and Austria. In terms of income alone, the United States tops the list.
In a working paper released in 2016 by the National Bureau of Economic Research, University of Michigan economist Gabriel Ehrlichand and University of Illinois economists David Albouy and Yingyi Liu write that because housing is a basic need and an expense that can’t be avoided, price increases hit poor Americans hardest. They find “increases in the relative price of housing have increased real income inequality by 25 percent since 1970.”
“In terms of well-being, the gap is even wider than it first looks,” Ehrlich said. “It’s precisely because lower-income households spend more of their money on housing. They are getting hurt more than the official statistics would suggest.”
Housing costs have risen 40 percent more than the prices of other goods since 1970, Albouy, Ehrlich and Liu found. The share of renters who spent more than half of their income on housing doubled between 1970 and 2011.
Past performance is no guarantee of future results, as they say, but homeownership has traditionally propelled people up the ladder from renting to owning to selling things to renters and customers of their own.