Sunday, 13 April 2008

The miracle of housing wealth

The more you look into the numbers behind the housing bubble, the more delusional it seems.

Take for example the recently published data on UK household wealth. The Office of National Statistics claims that households are twice as wealthy today as they were back in 1987.

The table below describes what happened between 2001-6, when most of this new wealth was created. Apparently, housing wealth increased by over £1.3 trillion, while the total loans secured on these houses increased by just under £400 billion. In other words, one extra pound of housing debt generated £3.44 of additional housing wealth.

While the housing market was generating all this extra wealth, neither real GDP nor real household income increased by very much. Over the same period, real GDP increased by 11 percent, while household income increased by just 8 percent. At the same time, housing wealth increased by almost 60 percent.

Are we looking at a miracle here? Has the UK economy produced something out of nothing? It is an extraordinary thing, but people living in the same house and whose income has barely grown, can delude themselves into thinking that they have grown richer because the estate agent on the high street tells them so.

While on the subject of delusional wealth, the ONS also report that the assets of pension funds increased by £388 billion. Well, if we can believe that housing produced £1.3 trillion of extra wealth, we should find it too hard to stretch our imaginations and believe that pension funds also produced some magic wealth.


Anonymous said...

Soon we will see the miracle of the disappearing housing wealth.

Anonymous said...

Anon: "Soon we will see the miracle of the disappearing housing wealth."

As the house prices drop, do you think the council tax will fall accordingly?

Anonymous said...

So Alice are you trying to tell us that wealth is the result of actual productive work rather than signing a debt contract and sitting on your arse?

Somebody better tell Gordon Brown. It would appear the entire New Labour economic policy has a flaw.