Wealth Of Nations

I saw an article this morning which proclaimed that Australia was the wealthiest nation in the world. The basis for this assertion was the average household net worth, which is based almost entirely on skyrocketing property prices.

Now to an individual homeowner, his house is certainly a valuable asset which can be sold without too much difficulty and so actually does represent wealth. But trading one house for another is meaningless, to realize wealth from the sale he has to take the cash and become a tenant (or leave the country). Which means that someone else has to enter the housing market and provide the cash – although not necessarily to our seller, there is often a long chain of transactions between the entry and the exit. That market entrant is most likely reliant on low interest bank finance to make his purchase.

But when it comes to collective wealth, the claim seems to me to ring hollow because housing is a local asset. Sort of by definition, it can only be used and paid for by residents and so its price is entirely defined internally, there is no disinterested measurement nor is there liquidity for the housing stock as a whole. Surely national wealth should be measured by exportable assets, whether tangible or not, that can be purchased and used in and by other countries and whose price is set in international markets.

Obviously this would include natural resources, with which Australia is certainly well provided, but probably not as well on a per capita basis as Canada or Russia. Other less obvious valuta would be intellectual property, probably the US’s domain, engineering skills, resources and capability where Germany might lead, manufacturing capability where China might dominate, and so forth. These tradable assets represent true national wealth, not the artificial price of housing.

With apologies to Adam Smith for the title.

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