Inequality

Causes and Considerations

Danielle Park, a Canadian investment advisor, author and blogger, reported recently (1) that the Canadian average house price was 4x income in 1994 (ie. $200,000 house and $50,000 income).  In 2024, even after dropping up to 20% from their peak, our average house price is 8x income (ie. $400,000 house at the same $50,000 income).

During the same Thoughtful Money interview, titled “Stocks Are The Most Overpriced in 100 Years”, she reports the current US S&P stock market at its current overpriced level can expect 40% mean reversion (correction) based on historical results.  Note the Canadian TSX is also at all-time highs and follows a similar, albeit less volatile, route up and down as the US S&P.

These are two stark examples of conditions where Canadian financial inequality is obvious:

·         If you’ve owned a home for 20-30 years, its equity is wealth you have that the younger generation struggles to even start to create

·         If you’ve been in the stock market for 10 plus years, market prices today give you a “paper” wealth far more than the long-term mean

As a result of these beyond normal gains in home and market wealth, a new inequality has emerged.  Dr. Eliza Filby recently published a book in the UK called Inheritocracy: It’s Time to Talk About the Bank of Mum and Dad.  Filby talks about how children born from the 1990’s forward are becoming class separated (or not) by their parents’ wealth.  Parents (who can) are now supporting education, housing, childcare and more.   Their children are advancing in society because of inheritance rather than earning capability.  Inequality grows.

So what?  Well, we have learned from history that inequality is a cycle with highs and lows.  Howe’s Fourth Turning work suggests we are likely at or near a high before a return towards the low in the next 5-10 years.

To Be Prepared for an inequality correction, we, our families and our advisors should consider:

·         Home prices flatlining or dropping while incomes increase until we return to 4x

·         The stock market correcting 30-50% with a multi-year recovery

·         Governments stepping in to directly tax your net worth in addition to your income

·         Quite possibly some combination of these scenarios

How does each affect you?  Your child?  Your parent?

A final thought.  A return towards financial equality likely benefits those of us under 40 or 45 years of age and harms us beyond 45.  To prepare, you and yours can consider some of the strategies presented in previous and future blogs.

1.      Danielle Park on Thoughtful Money, YouTube, November 10, 2024

2.      Inheritocracy book, Dr. Eliza Filby, and YouTube interview by PoliticsJOE, October 3, 2024