How much false wealth is in the UK as a result of house prices?

tomstickland

It might seem obvious, but I was thinking about this last night.
Take an asset like houses that start off with a net value based on selling price at that time.
Then make borrowing money very cheap and relax the rules so that more money can be lent to people.
The increase in money supply means that prices can rise and people can still afford the same type of properties.
Prices do rise (for whatever reason).

Equity is "released" to fund consumer spending and to allow purchase of more properties.

Prices rise further.

The net sale value of the same set of houses is, say, now twice as much.
Call me old fashioned, but none of this has actually produced any output of value, apart from maybe stimulating other economic activity. So where has this apparent wealth come from? Well, it's based on the sale price of the assets. That in turn depends on a supply of money to pay for it.

Imagine that the full value is already covered in savings that people have and things will be OK. However, if the source of funds to cover that apparent wealth is more borrowing, then it only exists if those funds are there.

Say lending criteria and rates return to the conditions at the start. If the entire asset set was to be sold then there wouldn't be the funds there to pay for it. Their value is only a notional agreement on their sale price. Say that the entire stock returns to the value it had at the start. What then? You just end with a lot of people owing money to a lender to pay for things they bought.

Having written all of that I've just realised that it's very, very simple.

All that's happened is the rising value of the asset has allowed people to borrow money using the asset as security. If the asset falls back to its original value then they just have exposed borrowing.

My thinking two years ago was that house prices were fuelled mainly by cheap borrowing - a lot of people will always borrow as much as they can get hold of. When cheap borrowing is not available then prices will drop. Meanwhile a lot of consumer spending has been done using wealth that doesn't really exist. All that's really happened is that money has been borrowed.

WTF?_2

Can't say the exact amount, but it's a lot. I know that a couple of billion less is being MEWed now than it was a few years back so that's taking momentum out of the retail/services economy.

Have a gander at this:

http://www.marketoracle.co.uk/Article3872.html

Scroll down the page to 'UK GDP and House Growth' and look at the graph - GDP and house prices are spookily in sync.

They are putting the spin that the economy drives house prices and therefore as long as there's no recession, no real danger to the housing market. I'd say that it's the other way around - massive amounts of 'equity' in houses have been propping up the economy.

Paul_Baldwin

Hi Tom,
sounds about right to me, its all rather worrying to be honest. I personally know of someone who's been playing the numbers game with property. His initial investment was quite small but now there are 4 property's he "owns" and they are "worth" a considerable amount. From what I can see its a true house of cards?
I'm now glad I erred on the side of caution 18 months ago and fixed my mortgage for 10 years. My parents lost our house in the last recession, it wasn't a good time. My fear now is that they've been so clever with keeping the boom going artificially its going to bust in a big way. Like you say, does all the money thats been spent actually exist?

Paul.

basill

I `ve often wondered what the difference between `releasing equity` and getting a bigger loan is??

B

PasturesNew

I've only ever counted my wealth in terms of "how much cash can I draw out of the bank within a week if I have to". Houses to me never counted as you can't touch it and have no idea how long it would take to liquidate.

I have nothing on credit.
I have no credit cards.
I have £0 debt.

As I survey all around me, I know I own everything I can see. Everything. Outright. I estimate to completely replace everything I own brand new would cost me no more than £1000. Max! More than likely I could do it for £600.

Yes, not a lot is it. My cash is in the bank(s) and so none of it is fake wealth. And I have no need or desire for "things".

JonnyBravo

PasturesNew wrote: »

I have nothing on credit.
I have no credit cards.
I have £0 debt.

Nice sentiment but get a cash back credit card and pay it off each month.
Zero cost and free money come year end!

Very MSE and no work required other than initial application.

PasturesNew

JonnyBravo wrote: »

Nice sentiment but get a cash back credit card and pay it off each month.
Zero cost and free money come year end!

Very MSE and no work required other than initial application.

I don't see the point of these as I don't buy things.
You have to buy things to get the cash back.
I've never thought it would be worthwhile.

I could look at the Abbey one - 5% on supermarket buys only, but only up to 31/07. So that's worth about £8.

Or, I could get a 1% flat rate one. Which would make me about £25-30/year

It hardly seems worth the effort really.

I wonder how many people have found themselves buying things they don't need just because their mindset is "I get cashback, so it's rude not to buy things"

WTF?_2

PasturesNew wrote: »

I don't see the point of these as I don't buy things.
You have to buy things to get the cash back.
I've never thought it would be worthwhile.

I could look at the Abbey one - 5% on supermarket buys only, but only up to 31/07. So that's worth about £8.

Or, I could get a 1% flat rate one. Which would make me about £25-30/year

It hardly seems worth the effort really.

I wonder how many people have found themselves buying things they don't need just because their mindset is "I get cashback, so it's rude not to buy things"

Not very many I'd imagine as most people do have quite a lot of outgoings every month for which they can use their credit card.

They are also damned useful for emergencies as you have instant access to a line of credit which (assuming you pay it off within the period prescribed) is interest free.

Unfortunately too many people with no self control shamelessly overspend money they don't have using them - and a worrying trend is those who resort to credit from the card to pay bills and even mortgages. :eek:

JonnyBravo

!!!!!!? wrote: »

Not very many I'd imagine as most people do have quite a lot of outgoings every month for which they can use their credit card.

They are also damned useful for emergencies as you have instant access to a line of credit which (assuming you pay it off within the period prescribed) is interest free.

Unfortunately too many people with no self control shamelessly overspend money they don't have using them - and a worrying trend is those who resort to credit from the card to pay bills and even mortgages. :eek:

Yeah I suppose if you've got no self control then CC's=Bad

I have self control and use this to purchase anything and everything.

Nothing extra.
Just stuff I would have bought anyway.

£135 free last year!

No extra work, instead of taking cash out of my pocket I take my card out. Direct debit set up to repay full amount each month. No need to think about anything!

boinging_2

I agree these types of cards are great (especially for work related expenses).

Have you tried the ones where you get airmiles / hotel points? I think they tend to work out better than the straight cash back ones (obviously only if you like flyer or staying in hotels!)

JonnyBravo

boinging wrote: »

I agree these types of cards are great (especially for work related expenses).

Have you tried the ones where you get airmiles / hotel points? I think they tend to work out better than the straight cash back ones (obviously only if you like flyer or staying in hotels!)

Absolutely, prob half of my spending is business related expenses.

I use the hotel loyalty cards for their points for my business trips, that gets me enough free stays to not need anymore from a CC from them. (try to stick to Hilton and the various Holiday Inn types for that as they are multi-national with loads of choice)

Don't collect airmiles.




Just....
Show me the money!