By Svilen Kolev
"Rich people acquire assets. Poor and middle class acquire liabilities they think are assets," says Robert Kiyosaki in his bestseller Rich Dad Poor Dad. In the world of finance, net worth, or net wealth, is taken as the difference between the value of the assets an individual, household or company owns and the amount of liabilities they have accumulated.
Net worth is an important metric for measuring accumulated wealth, but it also serves to measure the financial health of a company or household. It can also be taken as an inverse indicator of the poverty level.
Anyone could calculate their net worth by determining the value of all the assets they own and the amount of accumulated debt. Assets include cash, savings on current and savings accounts, deposits, gold, investments in financial instruments - shares, bonds, investments in mutual funds, funds for pension insurance. A car can also be classified as an asset, although Robert Kiyosaki takes a very different view.
Liabilities include consumer loans, mortgages, credit card debt, student loans (if any), car purchase or repair loans, and other short-term and long-term obligations (eg unpaid bills). There is also one particular and very important category of assets that should also be included in the list of assets for calculating net worth - personal property owned.
Why am I talking about a "special" category? First of all, because 2/3 of the EU population lives in their own homes. As of 2021, the share of citizens living in their own property in Bulgaria is 84.9%, according to data from the National Statistical Institute (NSI) and Eurostat. That means only 15.1% of Bulgarian citizens live in rented accommodation. In comparative terms, Bulgaria ranks seventh among EU countries in terms of the share of households living in their own homes. And vice versa: Bulgaria is twenty-first in terms of the share of people living in rented accommodation.
Along with cash and deposits, owned properties have a very large share and a high relative weight in the total amount of assets and, accordingly, in the net well-being of households in Bulgaria.
Why is this so? And why is it most likely that the value of real estate has the largest share of assets that determine net wealth. The main reason lies in the evolution of property prices in recent years.
In the EU, after 2010, a strong trend of rising property prices was observed, especially in the period between 2015 and 2021, when the average appreciation reached 37%. With the biggest increases in the period 2010 - 2021 are property prices in Estonia (+139%), Hungary (+122%), Luxembourg (+115%), Latvia (+101%) and Austria (+100%), according to NSI and Eurostat data.
In Bulgaria, for this period, the growth is only 41%, but if we add the price increase of about 25% only for 2022, the increase is already quite significant. Accordingly, in recent years the net welfare of the average household in Bulgaria has also grown significantly. The data for 2021 show that the growth of the total financial assets of households in Bulgaria compared to the previous year 2020 grew the most compared to all EU member states - by nearly 30% (with a growth of only 10% of the financial liabilities of Bulgarian households in 202 compared to 2020 ). Apart from that, mortgage debt alone represents 10% of GDP in 2022, which is quite low compared to EU countries.
Comparing these data with the amount of the minimum wage, according to which Bulgaria ranks last in the EU, an interesting comparison is obtained. It should also be emphasized the finding of the Organization for Economic Cooperation and Development (OECD) in the latest Economic Review of Bulgaria from March 2023 that half of the taxpayers declare that they are on the minimum wage. Income from salary in the amount of more than BGN 3,000 (€1,530) is declared by just over 6%.
Of course, in almost all EU member states (except Germany), owning a property is more common than renting. In Germany, living in a rental takes a slight edge over owning a property, with just over 50% of the population renting. Austria and Denmark follow with a share of 46% and 41% (according to data as of 2021).
Of course, other things being equal, the value of property owned in net worth should be viewed through the lens of price change. In the last quarter of 2022, house prices in the EU fell for the first time on a quarterly basis since 2015. Eurostat data shows that 15 of the 27 member states reported a drop in prices, with the EU average falling by 1.5% in the last three months of 2022. The most serious drop was in Denmark and Germany, respectively with 6.5% and 5%. And in the second half of 2022, Germany recorded its biggest six-month price decline in two decades.
A case in point is Sweden, where real estate prices have continued to fall in recent months and quarters. In practice, house prices in Sweden have erased almost all of their growth since the pandemic. Bloomberg believes that the largest Scandinavian country is experiencing one of the most serious shocks in housing markets in the world. One of the main reasons for this is the continuing cycle of interest rate hikes by both the Central Bank of Sweden and the ECB, as well as the cooling of property market activity and the decline in mortgage demand.
In the context of the increase in interest rates by the ECB and its slower transmission to the Bulgarian economy, higher property prices are not necessarily bad news. On the contrary, they are definitely good news for the net well-being of every Bulgarian. It remains to be seen how the pass-through of higher interest rates and increased minimum reserve requirements for banks in Bulgaria will affect the mortgage market and property prices amid expectations of price normalization in 2023, but not colossal declines. So, the analogy with developments after the Global Financial Crisis of 2008 will simply not be relevant.
Therefore, net wealth and the poverty level are relative. As is the change in the wealth of the richest people on the planet, tracked daily by the Bloomberg Billionaires Index, when the shares of Tesla or Facebook drop in price or rise in price sharply. The situation is similar with the net wealth of households, when not only the prices of their financial instruments and deposits rise, but also when the prices of the properties they own rise.