FT - "no housing-fuelled consumption boom"

Mr_Mumble · 15 June 2009 at 10:37PM

Certainly blows some pre-conceptions out of the water :cool: . I recommend reading the full article in the FT:
http://www.ft.com/cms/s/0/51b01218-59d1-11de-b687-00144feabdc0.html?nclick_check=1

but here are some choice passages for the lazy

:

for all the talk of shop-till-you-drop consumers bashing their credit cards, consumption this decade has fallen as a share of GDP by 1.3 points, with declines even during the supposed consumer boom years of 2006-07.

John Gathergood and Richard Disney of Nottingham University compared the spending and saving behaviour of the same households over time and found, first, that those renting properties were just as likely to reduce their saving when house prices were booming as home owners were.

If there is almost no evidence that consumption boomed this decade in Britain as a result of house price appreciation, why did household debt rise so explosively?

There is no disagreement that high house prices are related to this increase in debt, but a fierce disagreement persists between those who think loose lending criteria forced house prices higher and those who believe, as Mr King does, that high house prices led to higher debt because those buying a home needed a bigger mortgage than the people selling – as the vendors enjoyed capital gains from previous house price rises. While both arguments have merit, the important point is that debt and house prices went together, not debt and consumption.

Then, if consumption is not the obviously unsustainable element, where should the spotlight fall? Government spending on goods and services is the short answer. Health, education, defence and law and order spending (including capital expenditure) grew extremely rapidly from 2000, when all this accounted for 20 per cent of GDP, to the 24.4 per cent it reached in 2008. Although financed by borrowing, this rise appeared under control until the recession hit, because tax revenues were strong, particularly corporation tax paid by the risk-taking financial sector. Again, this was the reverse of the 1980s.

The public spending bonanza, financed by erratic financial sector profits, was clearly unsustainable. With tax revenues slashed by the recession and borrowing set to rise to £175bn ($286bn, €207bn) or 12.5 per cent of GDP, this level of government consumption will not be able to continue. The big story of the next decade will be government retrenchment and deficit reduction.

Check out this graphic to see government largesse vs household frugality:
http://www.ft.com/cms/29e67d9c-59d3-11de-b687-00144feabdc0.gif

Generali · 16 June 2009 at 12:43PM

Ah yes. I meant to reply to this one.

Across the world, corporate profits had been rising at the expense of real incomes for quite a few years. IIRC, a couple of years back, company profits as a proportion of GDP reached an all time high (both in the UK and internationally).

That's great if you're a Government (high profits mean high tax receipts) and is obviously great if you're a shareholder. Clearly it's less good if you're a worker being squeezed.

I think the big shift that pretty much everyone is missing right now is the 'corporatisation' of the world - complex Laws making it ever more efficient to be big because it reduces compliance costs per unit; Governments looking to solve more-and-more social problems by micro-management and so needing to become bigger and more expensive to do so.

The reason this is happening is that people want more 'certainty' in a world which seems to be changing more-and-more quickly, although I think that mostly it's not that change is happening faster, it's the speed at which we're told about changes.

kennyboy66_2 · 16 June 2009 at 1:07PM

I must admit I was a bit gob-smacked by this and I had to laugh at the bit about people renting reducing their savings levels along with home owners.

"The rise in household debt to 160 per cent of disposable income, from 100 per cent in 2000, has to unwind, says Andrew Bridgden of Fathom Financial Consulting, and if that happened gradually, “then growth in consumption would be subdued, perhaps close to zero, for the next 10 years”"

I guess you could argue by the same token that much of this unwinding will take place in house prices over the next decade.

mbga9pgf · 16 June 2009 at 1:33PM

So where did all that Mortgage Equtiy withdawl go then? (circa 6% of GDP)

It fell yes, but again , statistics. Relative to what people were spending in the early 90's it boomed massively. You only have to look at credit card debt to figure that one. The thing is, if you look at spending compared to CPI (it is a consumer index after all), instead of GDP growth, you will get the real picture.

Of course, renters reduced their savings as much as homeowners. All that proves is advertising has become more effective in swaying people from saving to spending. Difference is, renters couldnt fall back on MEW.

This has always been my point; why should I pay extortionate prices to pay for the boomer generations stanna stairlifts, exotic holidays and purple rinses? They have had it good enough as it is.

Mr_Mumble · 16 June 2009 at 2:39PM

Generali wrote: »

Ah yes. I meant to reply to this one.

:beer:

Across the world, corporate profits had been rising at the expense of real incomes for quite a few years. IIRC, a couple of years back, company profits as a proportion of GDP reached an all time high (both in the UK and internationally).

Rising corporate profits were mainly a result of increased financial leverage (debt), yes? Relative to GDP (especially the investment and net export elements) its little surprise this rose. I don't see why increased corporate profit would hurt real incomes, I'd have thought employees would get an artificial boost in wages like the government did tax revenue.

That's great if you're a Government (high profits mean high tax receipts) and is obviously great if you're a shareholder. Clearly it's less good if you're a worker being squeezed.

But, shareholders have lost out over the past decade.

.

I think the big shift that pretty much everyone is missing right now is the 'corporatisation' of the world - complex Laws making it ever more efficient to be big because it reduces compliance costs per unit; Governments looking to solve more-and-more social problems by micro-management and so needing to become bigger and more expensive to do so.

The reason this is happening is that people want more 'certainty' in a world which seems to be changing more-and-more quickly, although I think that mostly it's not that change is happening faster, it's the speed at which we're told about changes.

Agree with the corporatism and compliance costs angle, just take a look at how well supermarkets are doing compared to the high street. The idea that people want more 'certainty' and so demand greater governance makes no sense to me. The USA was the economic superpower of the 20th century while offering its citizens the most uncertainty in terms of employment and less government than other sizable countries. You could get more 'certainty' and governance in the the USSR!

mbga9pgf wrote:

Relative to what people were spending in the early 90's it boomed massively. You only have to look at credit card debt to figure that one.

Could just be credit card debt innovation i.e. longer 0% periods, the preponderance of "tarting" and the lower, more stable, interest rate environment?

The side bar in the article ("Do Not Adjust Your Data Set") tries to deal with the statistical anomalies and what data to use.

Debate House Prices

FT - "no housing-fuelled consumption boom"

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