Owning your home doesn’t make you rich. Owning somebody else’s does

In every country examined in a recent study, homeowners' wealth hovers near the national average. The biggest gaps are between those who own businesses and rental properties and their customers and tenants.
(David Zalubowski / Associated Press)
The Washington Post

In the United States more than almost anywhere else, wealth and income are concentrated among business owners and landlords. 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 in 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 the recent working paper, Austrian central bank 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, not across country 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% 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% 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% are most likely to be renters. The top 5% 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.

This divergence between worker and owner is perhaps the oldest take on wealth inequality. Yet economists who measure these things on a global scale have sidelined it in favor of comparisons between the “1 percenters” and the other 99%. They had to. Many data sets don’t include an individual’s housing- or business-ownership status, for reasons of availability or privacy. Without those identifiers, researchers can only measure wealth distribution in terms of the wealth itself.

James Davies, an economist at Canada’s Western University whose work on international wealth measurement spans four decades, observed that large-scale stock ownership performs a function similar to owning rental properties or businesses. If Fessler and Schürz had taken equities into account, the differences between the United States and other countries would probably have been larger.


Davies said the share of business owners and landlords across countries is similar enough to make him think the measure leaves unexplained a significant proportion of international variations in inequality.

Understanding how ownership of real estate and financial assets differs across levels of wealth helps economists evaluate other consequences of wealth inequality, such as disparities in safety, social power and consumption, said Maximilian Kasy, a Harvard University economist who has collaborated with Fessler in the past.

The analysis “helps with understanding the causes and consequences of differences in the distribution of total household wealth across time and across countries,” Kasy said. Those differences arise when people use their savings to make up for missing or inefficient public pension systems, higher-education opportunities, housing and healthcare.

Fessler says social relationships reveal how wealth levels and wealth uses interact. A renter might use her wealth to fund retirement, while a business owner might use her wealth for technology, machinery or even influence by making political donations or running for office.

“It is not the same to save for an emergency, or to accumulate wealth in order to exercise power in society,” said Schürz, Fessler’s coauthor. “When researchers only measure the distribution of net wealth between households, they risk overlooking these distinctions.”

University of Michigan economist Gabriel Ehrlich said the underlying inequality squares with his understanding of the gulf between renters and owners in the United States, but he questioned the broader applications of the “sociological” frame used by Fessler and Schürz.


In a working paper released in 2016 by the National Bureau of Economic Research, Ehrlich 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% 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% 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.

A 2016 study by sociologists Alexandra Killewald of Harvard and Brielle Bryan, now of Rice University, supported this. After controlling for other factors, they wrote, “each year of homeownership between 1986 and 2008 is associated with about $4,400 more in midlife wealth.”

But it’s getting harder for renters to become homeowners. “Prices have gone up relative to income,” Ehrlich said. “A 20% down payment is a lot more money now than it was 30 years ago.”


According to Ehrlich, zoning restrictions have helped raise home prices, especially in high-cost communities. He said that, according to another recent analysis he conducted with Albouy, “the effect in terms of raising home prices turns out to be bigger than any of the benefits.”

He pointed to an analysis by University of Minnesota economist Kyle Herkenhoff and collaborators. Their work reveals that decades of rising land-use restrictions have slowed economic growth and made homes more expensive.

Stricter lending rules in the wake of the housing crisis also put homeownership out of reach, Ehrlich said.

Until recently, homeownership hadn’t budged for a decade, even as the number of renter households climbed.

The next step on the ladder — owning a business or renting out property — also seems to be slipping out of reach. Small-business start-ups in the United States cratered during the recession and haven’t recovered.

When the avenues of mobility dry up, the differences between renter and landlord, and between customer and business owner, calcify. Rent keeps flowing up the ladder, from renter to landlord, but the renter doesn’t get the same opportunity.


Van Dam writes for the Washington Post.