Financial assets and housing driving the wedge between the poor and wealthy in Ontario
Recent debates around the minimum wage, introduction of a basic income pilot, and the current and future impact of automation on the labour market place an emphasis on income inequality, while wealth, an equally important and related measure of economic health, is often overlooked. Recently, wealth inequality has emerged as a popular topic of discussion with the release of Thomas Piketty’s Capital in the Twenty-First Century, which documented growing income and wealth disparity in Europe and the United States. The recently released 2016 Survey of Financial Security allows for a detailed analysis of wealth in Ontario. Specifically it shows how the poorest families did not share much of the rise in the dominant growing assets, exacerbating wealth inequality.
Wealth is often measured as net worth, the difference between the value of all assets and debt. It is especially important for a household’s long-term economic well-being, affecting the ability to fund retirement, weather interruptions in income flow, or make significant investments.
In 2016, the median value of net worth (assets minus debts) for families in Ontario was $365,700, up by 58.6 percent since 2005 and the second highest amongst all Canadian provinces behind British Columbia ($429,400).  This overall gain in net worth was mostly due to strong growth in the median value of private pension assets and principal residence for those that owned these assets.  The median value of these assets grew by $83,600 and $169,000, respectively, since 2005. Although a smaller percentage of families held these assets in 2016 than in 2005, the change in the total value of these assets made up 72 percent of the growth in all assets in Ontario between 2005 and 2016.
Despite a rising tide, the gains in wealth have been concentrated at the top. The average net worth for families in Ontario grew by $253,600 since 2005 while median net worth grew by $135,100, widening the wealth gap (difference between average and median net worth) to a total of $372,000. The differences in growth and levels of net worth are even more apparent by wealth distribution (Exhibit 1).  The average net worth for the lowest 20 percent of families actually dropped by $2,500 over 11 years while the top 20 percent grew their average net worth by $801,900. Wealth for the middle quintile of families certainly grew at rates comparable to the richest 40 percent, but families at the very bottom lag behind considerably. In British Columbia, the overall growth in net worth was better distributed across the wealth spectrum. Ultimately, in Ontario the top 20 percent of families by net worth accounted for more than 65 percent of total net worth in 2016 while the total net worth for the lowest 20 percent was negative (-$2.668 billion). Public plans backed by the government such as Old Age Security, Guaranteed Income Supplement, and Canada Pension Plan are not accounted for in the survey responses, but would likely only bridge a small portion of the differences in wealth.
The value of primary homes and private pensions help explain most of the wealth disparity; together, they made up almost three quarters of the growth in total assets in Ontario since 2005. Of the families that own private pension assets, the average value of these assets was over $800,000 for the wealthiest quintile of families in 2016. The average for the bottom quintile of families stood at $9,300 in comparison. Additionally, lower net worth families are also less likely to own private pension assets – less than 20 percent of families in the lowest quintile group held any form of private pension assets, down from almost 29 percent in 2005.
Changes in the value of primary homes alone represented 43 percent of the total increase in assets in Ontario and disproportionately accrued to those at the top. The growth rate of the average value of a principal residence was the greatest for the wealthiest families and diminished for each group of families lower down in the wealth distribution (Exhibit 2). To make matters worse, many of the poorest families were unable to take advantage of the booming real estate market. In 2016, only about 43 percent of those in the second quintile had a primary home in their name, down from 50 percent in 2005. This percentage is likely much lower for the bottom 20 percent of families. After accounting for outstanding mortgage debt, the total net value for a primary home (total value of mortgages less the total value of homes) grew roughly two-fold for each of the top three groups of families in the wealth distribution. The second quintile from the bottom only achieved half that pace of growth over the same period.
Real estate assets as well as assets held in employer pension plans and other registered pensions are critical components of wealth inequality in Ontario. The increasing accumulation of these assets towards the wealthiest families goes back to Piketty’s central hypothesis at the heart of inequality: if the rate of return on wealth (capital) exceeds the growth rate of the economy (r > g), wealth inequality will continue to grow. Returns on housing assets have done astonishingly well in several advanced economics, even when stacked up against the performance of equities. Part of the reason families in Ontario at the lower end of the wealth distribution are separated from the pack is because they could not take advantage of the appreciation in real estate assets over time. Still, investments in the housing market look increasingly risky in vulnerable markets such as Toronto and Hamilton and are out of reach for poor families, especially with rising interest rates and tighter rules on mortgages. In the US the concentration of wealth can be partially attributed to high stock ownership by the wealthiest in the country. The wealthiest 20 percent of families in Ontario have roughly 45 percent of their total assets in financial assets, most of which are in private pensions. Any serious attempt at tackling wealth inequality should allow the least wealthy in society to reap the benefits of the increasing value of real estate and financial assets.
Written by: Saad Usmani
Photo Credit: sorbetto, iStock
 For net worth, the total, average and median values, as well as the number and percentage of economic entities holding, are calculated using all values including net worth equal to $0. For all types of assets and debts, the total, average and median values, as well as the number and percentage of economic entities holding, are calculated using values not equal to $0. All values are in 2016 constant dollars.
 Private pension assets include Employer-sponsored Registered Pension Plans, as well as Registered Retirement Savings Plans and Registered Retirement Income Funds among other private pensions.
 Families are arranged into 5 quintiles after ordering them by lowest to highest total net worth and dividing them into the lowest, second, middle, fourth and highest 20 percent of families by net worth.