There are fewer millionaires — but don’t blame it on real estate
A World Wealth Report found that the number of millionaires fell by 800,000 in one year, but real estate has been a fairly resilient asset.
- The number of high-net-worth individuals with over $1 million in assets took a hit in 2022.
- However, the drop in global millionaires can be blamed largely on drops in the stock market and poor hedge fund performance.
- The middle class population continues to grow and is more likely to build wealth through real estate and equities.
If anything, the economy has remained surprisingly resilient in the last six months — jobs reports have been strong, real estate has only had regional busts and home equity is still high, and inflation has been dropping consistently.
But one segment of the economy that has suffered is the upper end of the wealth spectrum.
High-net-worth individuals have taken a hit
Whether the economy is riding high or low, it's nearly impossible to time the market. But the Fed's fight against inflation over the past year clearly affected the stock market, which had an outsized impact on high-net-worth individuals.
According to the latest World Wealth Report from Capgemini, a major financial services and research firm, there has been a notable drop in the number of significantly wealthy people just in the last year. Between the end of 2021 and 2022, the number of millionaires fell from 22.5 million to 21.7 globally, a 3.3% decline and the largest drop in high-net-worth individuals in the last 10 years, the report said.
It's worth noting that 2013 is widely viewed as being near or at the bottom of the last economic downturn and when home prices were at their lowest.
But is there any correlation between now and then? And are we at the bottom of today's housing cycle? It's not so simple, Capgemini EVP and Global Industry Head for Retail Banking & Wealth Management Nilesh Vaidya told Real Estate News.
"Even though the number of high-net-worth individuals and their wealth has dropped, real estate is a longer-term view, and that it is holding constant will mean that it's less affected by the immediate changes in the interest rates," he said, suggesting that real estate has actually remained steadier for high-net-worth individuals than other investments.
Real estate played less of a role than securities
The housing crash in the later years of the aughts had a major impact on wealth and the global economy. Today, noted Vaidya, real estate plays a smaller role in the portfolios of today's wealthiest individuals than it did in the lead-up to the financial crisis of 2008. In January 2006, real estate, in the form of investments, made up roughly 24% of global high-net-worth individuals' wealth. By January 2022, real estate comprised only 15%.
High-net-worth individuals are now more heavily invested in other asset classes like traditional securities and equities, the report suggests. And the stock market is particularly vulnerable to changes in global events and trends.
Hedge funds had a bad year in 2022, the report said, declining 4.3%. And "alternative investments" as a whole — which also include private equity and digital assets — fell from 29% of the total wealth of high-net-worth individuals in January 2022 to only 23% by the following year, according to the report.
Despite the turmoil, there remains a big opportunity for the middle class, which includes the "mass affluent" — individuals with a net worth between $100,000 and $250,000, excluding their primary residence — and the "affluent," who are worth between $250,000 and $1 million. That latter category has increased steadily in the last several years, rising from 40.5 million individuals in 2015 to 53.8 million people in 2022.
"Effectively, the middle class is growing, and this group has a huge amount of investable assets," Vaidya said. The segment is largely invested in the equity market and real estate, unlike higher-net-worth individuals who have a lot of their wealth invested in alternative assets. Which is why the middle class continues to grow while the wealthiest in the world have taken a hit.