Interesting article on falling house prices and the 'wealth effect'

carolt

Apologies if posted before:

http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=11885272

trulysaintly

Come on Carolt, what is your vested interest in all this - or do you just enjoy twisting the knife????

morg_monster

edited: can't be bothered to get involved

Generali

The piece itself is very interesting. The wealth effect is well documented by economists but it's strength is a matter of fierce debate.

The BoE put out a paper a few years back in which they said that the WE was negligible. Others think it's very strong, accounting for up to 10% of marginal spending.

My feeling is that there is an effect but that it's pretty weak in this country usually although has probably got stronger with the MEW phenomenon that has marked this housing boom.

carolt

Agreed - what really struck me reading the article was that it failed to mention MEW!

To ignore the £300 billion + withdrawn and spent since 2000 in the UK alone whilst discussing the 'wealth effect' of house prices seemed a fairly impressive oversight!

harbinger13

Taking Generali's view that WE is less in UK - it is certainly high in US - way high.

Simple examples that I have seen - people who bought their houses and then daily watched zillow.com show the higher prices on their property - adding $50 to $100 each day, just stopped cooking at home and daily drove to a McD nearby and ate 'healthy' food!

I happened to be a friend of such a person - who said, he and his family did not have time to cook at home and besides he could afford it.

So I believe this paper address at least recognizes this effect.

As I see, once people draw a debt and if their asset (bought with the debt) supposedly rises - may it be just on paper - it just gives them the confidence to spend the gain physically now via cash. A good example of current spending of Net Present Value - where people fail to realize the NPV is calculated based on the future.

(I am a fan of NPV - sorry if my posts contain quite a few references to it).

justpurchased

harbinger13 wrote: »

Taking Generali's view that WE is less in UK - it is certainly high in US - way high.

Simple examples that I have seen - people who bought their houses and then daily watched zillow.com show the higher prices on their property - adding $50 to $100 each day, just stopped cooking at home and daily drove to a McD nearby and ate 'healthy' food!

I happened to be a friend of such a person - who said, he and his family did not have time to cook at home and besides he could afford it.

So I believe this paper address at least recognizes this effect.

As I see, once people draw a debt and if their asset (bought with the debt) supposedly rises - may it be just on paper - it just gives them the confidence to spend the gain physically now via cash. A good example of current spending of Net Present Value - where people fail to realize the NPV is calculated based on the future.

(I am a fan of NPV - sorry if my posts contain quite a few references to it).

Only thick people think like that(sorry i am not calling you thick) i think the majority look at there income-outgoings=dispoasble income.
That is the same if you own a house or rent.
It would be like saying people renting are blowing a £1k per month because they do not own a house and that is what house owners are losing!
If some STR's are more fool them as it is the same as doing the above.

carolt

It is almost certainly true that the sensible majority did not do this. Nevertheless, £300 billion+ has been MEWed since 2000 in the UK - that's a LOT of money. That's £5000 for every man, woman and child in the UK. And given how many men, women and children don't own their own property and haven't MEWed, some individuals have borrowed a hell of a lot. Yes, some of it will have been spent productively, in doing up and adding value to their homes. But an awful lot has undoubtedly been blown on new cars, holidays etc.- it has helped support the consumer boom we have experienced over the last 10 years.

justpurchased

I Agree. It is the people who Mew beyoned there means are the problem but these are the same type of people who live beyond there means and go bust in rented property.
Unfortunatly some people had been given a chance on the property ladder and royaly screwed up. others didn't.
We will be having the same conversation in 18 year or so some people just cant control there spending!

Conrad

I can say with a degree of confidence that people most certainly did MEW to indulge in discresionary spending.

An example of a real call I had that was fairly typical; "ello, yea what it is, I wanna nick some equity to buy an orse"
Car purchase was a common reason for MEW.

Furthermore, an underbelly of free and growing equity certainly does embue people with the confidence to spend more than they otherwise would.

Some of my sucessful self employed clients viewed MEW as the essential capital raising tool, given it was the cheapest form of borrowing, indeed some have the view it is criminal to let free equity languish idly.

Your librarian / Mastermind / Civil Servant / Building Society worker cautious types would tend to the exact opposite view, deeming MEW with a fervent almost religious distain.

justpurchased

Conrad spot on.

I had 10K car loan when we purchased our last house in 2001 @ 7.9% Mewed that after a year to 4.75. In total we purchased at £93K and during the 7 years there we spent £30K on house renervations and £25K in two cars, no debts and sold the house for £190K this year and had a mortgage to pay of £97K to pay off.

The way we played it was if we mewed we would overpay the mortgage with what it would cost to have the equiverlent loan over say 3 or five years. Making it chaep money.
Some people might say we were frivolus but we had 1 rubish car and a 10K debt when we purchased. We now have 2 nearly new cars and sold the house for £15K more than the next door neighbors advertised price (and that is still on the market, making the home improvemnts was needed to secure top money for the house)
This worked out to be cheap finance as it was things we were looking to do anyway. If we had just mewed and purchased a brand new 2X £40K chelsea tractor that would have been a waste of equity.