- Millennials have been locked out of the housing market by rising property prices, sparking a debate about economic inequality between the generations.
- But people forget that property and assets don’t just disappear. One day, millennials will inherit these riches, UBS Wealth Management’s chief global economist, Paul Donovan, tells Business Insider.
- Because the millennial generation is smaller than the baby-boomer generation they are inheriting from, this wealth will be more concentrated when it is finally transferred.
- This will make the millennials the richest generation of all time.
Every morning, UBS’ Paul Donovan wakes up at about 5 o’clock to record his daily podcast on global economics. Donovan is the chief global economist of UBS’ Wealth Management unit, and 10,000 to 15,000 people are on his listening list.
If you’re interested in economics – or if you are rich enough to be one of UBS’ private wealth clients – then Donovan’s arch commentary is crucial daily listening. His monologues are delivered in a withering, sarcastic style: Imagine a Bond villain who has a particular disdain for PMI data. And then imagine he has jetlag.
If Donovan is in London where he is based, this means he is waking up in the pitch dark. That’s not a guarantee, however. Donovan travels for 10 months of the year and has been known to record his 15-minute sound bites in airport lounges or from the back seat of limousine shuttles.
Regardless, he delivers his commentary largely without error or stutter. In two hours time – after UBS’ lawyers have vetted it – the Donovan daily briefing arrives in your email inbox at 7 a.m. That’s a full hour before the notionally official bell at the London Stock Exchange (which also rings in the dark, at least during winter).
We caught up with him recently to discuss one of the perennial topics of the World Economic Forum in Davos, Switzerland: inequality. Millennials have long complained that rising property prices have locked them out of the housing market, but Donovan’s view is that the problem will eventually solve itself.
“It’s worth pointing out that the millennial generation, which we’re all wringing our hands about – these poor people not able to own houses! – this is going to be the wealthiest generation ever that we’ve experienced,” he told Business Insider. “The basic fact is that wealth does not disappear in a puff of smoke,” he says. “The wealth is still there in the economy. As it’s passed down the generations, the fact that the millennial generation is a smaller age cohort necessarily means that the same amount of wealth will be distributed to a smaller number of people.”
“When I die my nieces will inherit the assets that I have accumulated. And indeed the assets my parents have accumulated… There are fewer millennials than baby boomers. The concentration of wealth will increase, and fewer people will share the national wealth.”
So if you’re a millennial, perhaps you can look forward to a bright future in late middle age, when your parents die and you inherit their house. If that generational transfer were to take place today, it would be worth £7 trillion ($US10 trillion) in the UK and $US32 trillion in the US. Those are the estimates of total existing property value. Global property wealth today is worth $US217 trillion.
‘Distribution of wealth is far less important than distribution of income’
But won’t that wealth transfer exacerbate inequality, because not everyone owns property? Inheritance is one of the main drivers of inequality, according to Thomas Piketty’s masterful analysis of wealth distribution.
Donovan has a counterintuitive answer to that: Wealth inequality is less important than income inequality, he says. The issue, Donovan argues, is that you cannot spend housing wealth until you cash it in, and when you cash it in your income can drop dramatically. Thus it is your income, not your assets, that drives true inequality.
“What is it that you are judging on? Inequality of wealth? Absolutely,” he says.
“But if we’re looking at inequality of lifestyle, that’s not necessarily the case. A stock of shares and equities doesn’t dictate your lifestyle. Income, arguably, does. But that’s not something that is going to be necessarily coming out of wealth inequality. What we are talking about is wealth in the future … inequality of living standards is not necessarily something which is distributed by the level of wealth in a society in terms of assets. Distribution of wealth is far less important than distribution of income.”
For most people, this is a controversial position. Surely a person who lives in a £1 million house in London is richer than someone with a salary of £50,000 who lives on Merseyside?
Wrong, Donovan says.
“So if you sell your house, fine. Where do you live? You will need income to afford somewhere to live (even if renting) and if the return on the cash that you get from investing your house proceeds is lower, your ability to rent a nice place to live is lower,” he says.
“You can, of course, spend the money, but the question becomes what do you do when the money is gone? (Apropos, my mother used to do a lot of work with the elderly in private-care homes, and this was a huge worry for them. What happens when the capital runs out? Can I stay here? Etc.). Which is why most investment ultimately comes down to providing an income stream – pensions that go into annuities and the like.”
In the meantime, that $US217 trillion millennial payday is likely to grow over the years. Does Donovan have an estimate of how much that generation will inherit in the future?
“We’re talking about wealth coming through in 20 to 30 years time. You have to make quite a lot of heroic assumptions about asset prices to put a precise number on it.”
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