Tuesday, April 19, 2011

Australian's per capita wealth is $266,600

What is per capita wealth and per capita income?

An economic measure that is bandied around commonly by economists and statisticians.
  • Per Capita Wealth - Total wealth of the country divided by the country's population number
  • Per Capita Income - Total personal income of the country divided by the country's population number
The behaviour of the 'typical' Aussie consumer is starting to surprise and baffle our reporters and statisticians. For years and years, overall, we've been a nation of negative savers.

But right now, our rate of savings are supposedly at record highs and we are taking out less new loans (credit card, car loans, mortgages, personal loans etc), making extra repayments on existing mortgages and paying down debt.

Craig James, CommSec's chief economist has crunched the numbers and have concluded that

* Our per capita wealth is $266,600
* Our per capita debt is $23,056 
* Overall wealth per household is almost $700,000

Median wealth(ie: the centre of the bell curve or the wealth of househould in the middle) would have been a more useful figure but economists prefer to use per capita wealth (which is total wealth divided by population number).

The problem with averages and per capita numbers are many though. If there's a larger number of poorer households or very wealthy households, then this can skewer the average resulting in the per capita or average figure being a useless number on which to base any comparison for the majority of the population.

But why are households so gloomy and pessimistic?

Living costs are seriously inflating. Fuel prices are up, cost of fruit, vegetables and meat are up. Utility prices of gas, water, electricity are up. Interest rates are up crippling debt holders. Median rental prices are up which means struggling renters and low availability of rental properties. If Gillard can manage to execute her Carbon Tax scheme then it's game over for inflation control.

Electricity prices will be increasing as well starting 1st July this year:
* EnergyAustralia 17.9%
* Integral Energy 16.4%
* Country Energy 18.1%

Rental stress

Anglicare's Rental Affordability statistics alleges that 600,000 families live in serious rental stress. Rental stress is defined as when households spend more than 30 per cent of the family income on rent.

Per capita wealth of $266,600 is a misleading figure

It only takes a few billionaires and several millionaires to skew the per capita number resulting in a meaningless result that doesn't reflect the majority of the population. The number that skews the results is referred to as the 'outlier'.

I'll illustrate using two examples, assuming the population is a country with only 5 people in its population. Noting that there are limitations in having a population size of 5.

Example 1 where the outlier is a high wealth household:
If wealth of the five people are $10,000, $30,000, $35,000, $40,000, $500,000

Median wealth would be $40,000
Per capital wealth would be $123,000

The maths to calculate per capita wealth:
(10k+30k+35k+40k+500k)/5 (population number) = $123,000

The median wealth of $40,000 is a more accurate representation of the population than the per capita wealth (which is similar to average wealth).

Example 2 where the outlier is a low wealth household:
If wealth of the five people are $10,000, $300,000, $360,000, $400,000, $500,000

Median wealth would be $360,000
Per capita wealth would be $314,000

As mentioned, there are limitations to these calculations of mine too because of the small population size. Australia's population of 22 million means that the median wealth of the househould ranked at 11 million would have been more reflective of where the bulk of the household wealth value lies.

Using the median household wealth would have meant that the poorer households aren't dragging down the per capita wealth  and the wealthier households aren't inflating the per capita wealth.

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