UK household wealth – heading for £8 trillion?

By John Hawksworth

There is a lot of attention paid to high household debt levels in the UK, but rather less to the asset side of the balance sheet. To get the full picture you need to look at both.

New figures on the national balance sheet released by the ONS on 15th August showed that the total wealth (‘net worth’) of the UK household sector, after deducting debt, reached just over £7.6 trillion at the end of 2012. This was up by over £400 billion on a year earlier, which represents an increase of around 6% in cash terms, or around 3% in real terms after adjusting for inflation (CPI). This followed a 3% real decline in UK household wealth in 2011.

In cash terms, UK household wealth is now around 11% higher than its pre-crisis peak at the end of 2007, although in real, inflation-adjusted terms it is still around 6% below that level. Given that the UK population has risen by around 3% over this period, average real wealth per household is still around 9% below its pre-crisis peak level in 2007 – but it does seem that recovery is now underway.

By far the largest single element in UK household wealth comes in the form of bricks and mortar. The total value of dwellings owned by UK households rose by just under 4% last year to around £4.2 trillion at the end of 2012, or around 55% of total wealth.

The remaining £3.4 trillion (around 45%) is mostly net financial assets such as equities, deposit accounts and other savings, after deducting mortgages and other forms of debt. This component of wealth rose by around 8% during 2012 as global equity markets rose in sterling terms and cautious consumers put more money into savings accounts.

Looking ahead, as argued in our latest UK Economic Outlook report, we expect the recent steady rise in house prices to continue over the rest of this year, potentially adding a further £200 billion (just over 4%) to UK housing wealth over the course of 2013 as a whole. A lot of this is due to policy measures: continued very low official interest rates and the government’s Funding for Lending and Help to Buy schemes.

We estimate that, to get total UK household wealth up to £8 trillion at the end of 2013, there would also need to be an increase of around 6% in net financial assets during the course of the year. But the FTSE 100 is already up by around 10% in the year to date and major international equity markets have on average risen by more than this in sterling terms. Continued very loose monetary policy in the UK and other major advanced economies has contributed to this by supporting asset values and so reflating private sector balance sheets.

Unless there is a significant stock market downturn over the next five months, it therefore seems quite probable that UK households will see their wealth rise to £8 trillion or more by the end of 2013, although we will not know that for sure until the new data are published in August next year.

Of course, there is nothing magical about this £8 trillion figure, and it would still be slightly below pre-crisis levels in real, inflation-adjusted terms. But a second successive year of relatively strong wealth increases is likely to boost the ‘feel good factor’ for UK households, encouraging them to spend a bit more. That is already evident in generally strong retail sales data in recent months.

All of this supports our view that the UK economy – driven primarily by the consumer – should finally be on the road to a more robust recovery than the sluggish upturn we have seen over the past three years. Having said that, there are still no grounds for complacency – there could yet be adverse shocks from overseas and household confidence could prove fragile so long as real incomes continue to be squeezed. But there is some light at the end of the tunnel and the upturn in household wealth helps to explain why.

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