The Surprising Borrowing Habits of the Rich

[Herman Munster]

http://finance.yahoo.com/loans/article/102370/the_surprising_borrowing_habits_of_the_rich

'There is a drive by the merely rich to keep up with the obscenely rich.' Whether it's buying a house or other personal asset, Mr. Hadar first calculates whether a loan makes economic sense. "It's an arbitrage. I won't just go out and borrow money to buy a boat, because there's no economic justification for using debt for that," he says. "But if I can make more than my borrowing costs from a loan, I'll consider it." For instance, he's thinking about buying a jet for business and personal use and says he may borrow up to 80% of the purchase price, since the jet saves him time and adds value to his business. He adds, "My litmus test is, if I can't pay it back in a worst-case scenario, I don't borrow."

With some measures showing prices for high-end goods outpacing the broader inflation rate, the wealthy are increasingly looking beyond mortgages to use debt for buying beachfront homes, yachts, cars and other collectibles. Private bankers say loans for jets are among the most popular. In fact, some sociologists and economists say the rise in wealthy people's debt stems in large part from the growing pressure among the elite to keep up with richer peers. The biggest disparities in wealth today are among the rich, with mere millionaires getting shoved aside by decamillionaires, centimillionaires and billionaires.

So the haves are borrowing more to keep up with the have-mores. Those in the 95th percentile to 99th percentile of wealth have almost twice as much debt as the top 1%, as measured against assets. Economists and wealth managers say it's the single-digit millionaires who are becoming the most stretched, as they borrow to match the lifestyle of even-wealthier people.

The result, says Dalton Conley, a sociologist at New York University who studies status, is even more debt. "What we're seeing is the top 1% struggling to keep up with the top 1/10th of 1%," he adds. "And those people trying to keep up with the top 1/100th of 1%. There is a drive by the merely rich to keep up with the obscenely rich."