Cost of Living the High Life Stays High - Merrill Lynch/Capgemini

Tom Burroughes

25 June 2008

The cost of the high life of luxury yachts, fine wines, art and jewellery rose at more than double the general rate of inflation in 2007 from the year before but figures suggest that high net worth individuals have not lost their appetite for spending despite market turmoil, according to a new report.

The Forbes’ Cost of Living Extremely Well Index, known as the CLEWI, which tracks a basket of luxury goods, rose by 6.2 per cent in 2007 from a year before, decelerating slightly from the 7 per cent rate chalked up in the previous year, according to the latest Merrill Lynch/Capgemini World Wealth Report released yesterday.

“The global art market and luxury industry segments tend to be latecomers to economic downturns. However, historically, investments in fine art, private planes, luxury automobiles and other high-priced collectibles have been more immune to economic downturns, as their ultra-HNW buyers tend to be less adversely affected by such trends,” the report said.

There were some head-turning prices fetched for art and related sales at auction last year. For example, in October, Sotheby’s sold a 6.04 carat emerald-cut blue diamond for a record $1.32 million per carat.

The report also showed that although there are regional differences in how HNW individuals and ultra-HNW individuals spend their money on “passion investments”, overall, the most popular spending item was “luxury collectibles”: cars, jets and yachts. This category made up 16.2 per cent of all spending, compared with 26 per cent in 2006. However, direct like-for-like comparisons are difficult to interpret because the report divides spending among slightly different classifications this year.

The second-largest category of spending is art collections, at 15.9 per cent, followed by jewellery, gems and watches, at 13.8 per cent, and luxury/experimental travel, at 13.5 per cent. The smallest category is “sports investments” – such as sports teams, sailing and race horses – at 5 per cent of all spending.

A trend seen last year has been the growing spending power of individuals from newly enriched countries such as China, India and parts of the Middle East and Latin America.

“We used to think in terms of hedge funds when targeting our customers. Now we look for barrels of oil,” said David Norman, worldwide co-chair of Sotheby’s Impressionist and Modern Art department.

Under the report's methodology, a HNW individual has at least $1 million of investable wealth, minus a primary residence and collectables; an ultra HNW individual has at least $30 million.