Since the turn of the century, we have had a dramatic boom based on huge increases in household debt. It was unsustainable and we are now being punished for our greed. So says the received wisdom.
It is always a good idea, when confronted with received wisdom, to look at the facts. Here are one or two interesting ones. From 2001 to 2007, household debt in Britain rose from £811bn to £1,533bn. A less well-known fact is that holdings of financial assets by British households rose from £2,929bn in 2001 to £4,043bn in 2007. So while household debt rose by £722bn over this period, household financial asset holdings rose by £1,114bn over the same period. Moreover, these financial asset holdings do not include property holdings by households, which are currently well in excess of £3,000bn, even after the recent falls in house prices. So the asset holdings of households have risen by considerably more than their debts.
From 2001 to 2007 there was a boom in house prices, hardly surprising in a period when the number of available homes grew much more slowly than the number of households. Because of this boom, when a first-time buyer takes out a mortgage, it tends to be much bigger than the mortgages being paid off. This is the main driving force behind the rise in household debt. Likewise, when last-time sellers leave the housing market because they enter care homes or simply die, the beneficiaries receive increasingly large lump sums as houses get more expensive. This is one of the driving forces behind the rise in household assets. So the boom in house prices is a key factor here. But has there been a boom in the economy too?
From 2001 to 2007, British GDP grew by an average of 2.8 per cent per annum and household consumption by 3.1 per cent per annum. Since these are close to the average growth rates over the last 25 years, there is not much sign of a boom here. To summarise, we have not had an economic boom and households have accumulated more assets than liabilities since the turn of the century. Not much sign of fecklessness and greed here. So why are we being so heavily punished? That is a story to which I shall return.
