Articles


Financial Review- How Did We Ge So Rich

Author: Fiona Carruthers
Date: 29/01/2005
Words: 2318
Source: AFR
Publication: The Financial Review
Section: Perspective
Page: 15

Between 2003-04, the number of millionaires grew 11 per cent to an estimated 117,000, which is way above the world average of 7.5 per cent. A combination of factors has contributed to this happy circumstance.

In less than two decades, he's gone from $92 a week as a trainee draftsman to head of his own building and development company with an annual turnover of $15 million. From a secondhand 1970s HK Holden to a silver Porsche (not to mention the 4WD, two speedboats and jet ski). Grand landscaped acreage on Melbourne's outskirts has replaced the single-storey weatherboard in Ivanhoe. Then there's the getaway on Sorrento beach and another by the Murray.

But like many of Australia's new breed of millionaires, Chris Seidler didn't set out to get rich or at least not this rich. "Sure, I set goals and have a strong work ethic, but I never made a conscious decision to become a millionaire," says the 41-year-old managing director of Seidler Homes, founded in 1992. "It just sort of happened. All of a sudden you get some money and you buy a property, take out more loans, buy more property keep growing your wealth and tackling new projects. I don't remember officially thinking: 'Geez, I'm a millionaire'. It was more like it hit me one day and I went 'wow, we really do live in the lucky country'."

Do you suspect that you, too, are holding a generous slice of the land girt by sea? Chances are, you're right. Not only are there more millionaires but it seems just about every working Australian is on the rainbow to a bigger pot of gold. How did the nation get rich? Is it simply thanks to strong economic growth? The rising number of small businesses? Paying off the family home early and indulging in some blue chips on the side?

The answer is all of the above, plus one critical ingredient: a generation of Australians discovered gearing.

As our wealth star shines brightly, number crunchers are scrambling to calculate how many millionaires the nation boasts. The number is doubling every four years, according to figures from the National Centre for Social and Economic Modelling (where the measure used includes equity in the family home). Merrill Lynch is also toasting its increasing number of seven-figure clients. The Merrill Lynch 2004 World Wealth Report found that for the first time Australia ranked among the top 10 in terms of growth rates of wealthy individuals.

Merrill Lynch looks at the number of people with funds of at least $US1 million, excluding the value of the family home. Between 2003-04, the number of millionaires in Australia grew 11 per cent, or an extra 12,000 people, taking the number to an estimated 117,000.

That growth rate is way above the world average of 7.5 per cent. When you calculate millionaires in Australian dollars, economic and social forecaster and chairman of IBIS World Phil Ruthven estimates this year there will be 288,000 millionaire households up from 255,000 in 2002. Whichever way you cut it, we've come a long way since 1980 when the nation boasted just 70,000 people nudging the big seven figures in net assets.

Economists would argue good fundamentals over the past decade have made it almost impossible not to buff your bank balance. Improved global economic growth last year, which at 5 per cent is the strongest growth since 1976, has been shadowed by increases of about 3 per cent in Australia's GDP. This follows a record 14 years of solid growth at home, which has seen productivity improvements, falling unemployment, declining inflation with incomes rising faster than prices.

GDP per head (at purchasing power per parity) rose 39 per cent between 1991 and 2004. In terms of investment returns, the Australian sharemarket rose more than 20 per cent in the past year. Indeed, our blue-collar credentials are dwindling, with chief economist at ANZ Saul Eslake pointing out people are now almost twice as likely to own shares directly as they are to hold union membership.

Meanwhile, the great love affair with property has not only paid off, but borne golden fruit, with house prices from the Sunshine Coast's Maroochydore to Tassie's Launceston doubling over the past 10 years, helping deliver ordinary people the "millionaire" tag they never dared dream of.

Even when house prices are soaring and the economy is steaming, you don't get really rich working for someone else unless there's a fair sprinkling of corporate share options included. Tony Bates, a former head of Macquarie Private Banking turned managing director of his own wealth advisory business, Bluepoint Consulting, says most new millionaires are small-to-medium business owners with the cash flow to keep building their businesses.

"The real money is in growing your own business and then selling it," says Bates. "There are thousands of people out there who bought themselves a job and are building small-to-medium sized unlisted companies, employing from 20 to 500 people. These are just normal people who had a good idea. They might not flash their wealth around, but these little businesses are spinning off huge amounts of cash."

To capitalise on this growing client base, Bates steered his own career away from stockbroking and banking towards accountancy: "Wealth in this country is in the family businesses and the most important adviser in a family business is the accountant."

Merrill Lynch's senior vice-president investments, Dara Minbashian, says 90 per cent of his clients sold a business, with the remainder comprising retiring senior executives with large shareholdings. "We say while fortunes are often made in one asset, they are preserved in many," says Minbashian, whose clients are looking to invest a minimum of $5 million.

Small business has thrived amid strong economic conditions. It's also had the added benefit since the early 1980s of watching the gradual dilution, to 50 from 59 per cent, of the share held by corporations in national economic revenue, estimated to be $2.35 trillion this year.

"Corporations are outsourcing a lot of non-core activities, like cleaning, accounting and personnel services," says Phil Ruthven. "It's creating a lot of opportunity for medium to small business to come in and soak up the revenue for those activities."

Since 1990, small businesses employing less than 20 people have accounted for about 27 per cent of the business scene and that figure is growing, with Ruthven saying just as many women as men are setting up businesses. If small business is the best shortcut to millionaire's row, equally, Australians have been rewarded for their investment of choice. From lime-washed beach shacks to inner-city warehouses and Californian bungalows, residential property offers one of the best growth return rates in the world.

Although his business, which employs some 100 people, is in development, Seidler insists that when it comes to his personal assets, he, too, is a happy victim of the great pre-property boom syndrome of just buy what you like. "Sometimes you get wealth by default," says Seidler.

"I bought two properties by the water because I love the water. We bought really early in Sorrento and now property prices have tripled. It's a default in that you don't see it as an investment, you're just purchasing somewhere you love. Then everyone else discovers they love it, too." Now buying is more of an educated decision and Seidler holds extensive investment properties, the latest being a vineyard resort development in the Yarra Valley.

Chief economist with retail and property consulting firm Dimasi Strategic Research Bob Schwartz describes the property market as a roller-coaster that took off in late-1997 and couldn't stop gathering speed. The result is a picket-fence fairytale of which we never tire: couple buys modest suburban family home, watches it soar in value, borrows against the equity to buy a rental property and negative gears.

"Households in Australia are instinctively more likely to spend out of housing wealth than out of sharemarket wealth," says Schwartz, adding people feel that with auctions they know the "true value" of their assets, compared with the more mysterious machinations of the stockmarket. "There's very little experience of housing tanking in Australia. The property market just doesn't go kablooey."

So popular is negative gearing that Schwartz recalls an old Westpac campaign urging people to buy not one but two investment properties. "It's just one of many examples of how incredibly easy it was for your average punter to buy investment properties," he says. At the height of the investment boom, banks were happy to lend 95-100 per cent. "When the $14,000 first-time home buyer grant was introduced, some banks were saying 'just hand us that and we'll lend you everything else you need'. That's no longer the case but money is still easily available." Schwartz says while loans for owner/occupiers recorded average annual growth of 11 per cent from 1992 to 2003, loans on investment properties have grown at an astounding 25 per cent a year over the same period. Even with property prices now stalling and many financial planners querying the wisdom of heavy property investment, the urge to jump on the bandwagon is still strong. Queenslander Dianne Humes is one recent property entrepreneur who borrowed against the equity component of her Brisbane home in 2000 to buy her first investment property. She now has seven investment properties with hefty mortgages.

Once she sells two of the properties later this year, Humes estimates she will hit net equity of $1.05 million. "Serviceability with the bank is at its limit," proclaims Humes, a former nurse now working as a public servant. "We've got positively geared properties supporting negatively geared properties. We consider what we have as 'good' debt and I'm not complaining: I've gone from zero to almost $1 million in equity.

"We have a strategy in place whereby specific properties will be sold, giving us the equity to further build on our portfolio. We'll definitely re-invest the equity in more properties."

Since Australians began servicing multiple bank loans, the other big story has become the rise in personal income-to-debt ratio, from 45 per cent in the early 1990s to 142 per cent in 2004. But Eslake says few analysts consider that the ratio of net worth-to-income has seen wealth rise from 4.5 times income in the late 1980s to a peak of 6.8 at end of 2003.

Whether through shares, property, business or a large executive salary, not everyone can be a millionaire. But the good news is most people are sharing at least some of the prosperity pie. CommSec Chief economist Craig James says between the 1995-96 and 2000-01 financial years, the number of people earning less than $350 a week has fallen to 28 per cent from 32 per cent, while those earning less than $750 has dropped to 45 per cent from 49 per cent. About three-quarters of the population is now earning more than $1000 a week.

"The clear trend in wages is that there are less people at the lower end of the wage scale, but it's fair to say most of the growth has been in the middle to upper bracket," says James.

Even if you're not sitting millionaire pretty, your savings will still have been assisted by wages rising faster than prices. James says that in the late-1980s, more than 52 per cent of household income went on essentials such as food, clothing and transport. Today, the figure is down to 45 per cent. Not only that, but prices on status-symbol technology products are tumbling as a result of the pace of innovation combined with cheaper imports. In the past 12 months, one brand of plasma television set has plummeted from $10,000 to $4000.

The barometer of spending, the annual cashcard retail index, has skyrocketed by 78 per cent since 1994. "Households have grown wealthier simply because income levels are increasing faster than prices, while essential items are falling in price as a proportion of income, leaving more money for extra items like DVDs and mobile phones," says James. "Purchasing power has also made people wealthy. The increased spending just reflects the virtuous cycle of the economy."

But where does all this leave those at the unenviable end of the ladder? Natsem economist Simon Kelly says when you factor in superannuation, the gap between the rich and poor is stagnant rather than growing. But it yawns widely when you consider Natsem figures showing the top half of the income bracket now owns 93 per cent of the country's wealth. Eslake adds that if home ownership has built wealth, "let's not forget 30 per cent of the population does not own their own home and they are missing out on the most effective wealth escalator".

Even for those who are driving the latest BMWs and holidaying in Europe, the outlook is not all roses. The head of Merrill Lynch's global private client group, Tom Alexy, points out being a millionaire is great, but it isn't what it used to be. "You need far more than $1 million to stay comfortable today," he sighs.

Economists argue the conditions under which many have built and consolidated their wealth, such as rising house prices, falling interest rates and inflation, are unlikely to be repeated. "It's hard to see house prices doubling over the next five to six years as we've just witnessed," says AMP chief economist Shane Oliver. "Is it sustainable? I'd say we could be at a period where wealth levels in Australia go sideways for a while."

It's a frightening thought when you consider Australians have almost double the amount of wealth in non-financial compared with financial assets. Oliver suggests it may be salient to consider "diversifying exposure".

Minbashian agrees, saying while people have become more sophisticated investors, there is still a bias towards property: "People realise residential property has gone up, but if you own a residential [investment] property you get 2.5 per cent return after costs," he says. "A decent property trust is returning 7.5 per cent in dividends and you don't have to rent or clean it."

Involved in preserving the wealth of multimillionaires, Minbashian points to another trend: increased anxiety. "We're seeing a real shift in terms of expectations," he says. "People don't just want to provide for their children they want to help the grandchildren and great grandchildren as well." As the song says: Who wants to be a millionaire? It's everyone.

Meanwhile, the great love affair with property has not only paid off, but borne golden fruit, with house prices from the Sunshine Coast's Maroochydore to Tassie's Launceston doubling over the past 10 years, helping deliver ordinary people the "millionaire" tag they never dared dream of.

Even when house prices are soaring and the economy is steaming, you don't get really rich working for someone else unless there's a fair sprinkling of corporate share options included. Tony Bates, a former head of Macquarie Private Banking turned managing director of his own wealth advisory business, Bluepoint Consulting, says most new millionaires are small-to-medium business owners with the cash flow to keep building their businesses.

"The real money is in growing your own business and then selling it," says Bates. "There are thousands of people out there who bought themselves a job and are building small-to-medium sized unlisted companies, employing from 20 to 500 people. These are just normal people who had a good idea. They might not flash their wealth around, but these little businesses are spinning off huge amounts of cash."