Even with £1.3 trillion debt, we've never had it so good

13 April 2012

It's official: Britons have never had it so good.

New research has shown that even after racking up debts of £1.3 trillion, households' wealth has soared to levels never before seen in UK history.

The extraordinary claim following an analysis of the impact of recent gains in house prices and on the stock market.

Banking giant Credit Suisse estimates that families' net weath has surged to £6.9 trillion this year from £6.3 trillion last year.

That is the highest on record. Britons' assets are now worth 8.2 times their annual disposable incomes - also the highest level since records began in the 1970s.

Last year the ratio was 7.9 times incomes, and in 1970 it was only 4.1 times, the research showed.

UK economists Robert Barrie and Neville Hill said the gains are being driven by an unprecdented boom on the property market.

Government figures show that the average house price is just under £198,000, compared with only £60,000 a decade ago.

On top of that, a substantial recovery on the stock market in recent years is adding to the nation's stock of wealth. While Britons' borrowings look daunting, most should be able to cope because their assets are so highly valued, the economists argue.

Hill said: "When you look at total net wealth it is clear that households have seen an extremely buoyant few years. The recent explosion of debt has gone in tandem with an explosion of wealth. In some senses, therefore, the debt levels look less unsustainable."

Credit Suisse calculates that residential property in Britain is now worth £3.7 trillion, compared with only £1.1 trillion at the beginning of the 1990s.

Financial assets tied to stock markets - including pension funds and unit trusts - have jumped to £4.6 trillion from £1.2 trillion over the same period.

According to the Royal Institution of Chartered Surveyors the property boom will continue next year, sending the average house price soaring above £200,000 for the first time. The price of a typical home will rise by an inflation-busting 7 per cent, the organisation predicts - the 12th consecutive year of gains.

Meanwhile many financial market strategists expect the FTSE 100 Index to add to the 33 per cent jump it has registered over the past two years.

Credit Suisse claims its analysis adds to arguments for further hikes in interest rates - following two increases in 2006.

The bank argues that because households feel wealthy, they are more likely to step up spending, which could exacerbate inflation.

Official inflation already stands at 2.7 per cent - the highest since 1996. The bank says that another hike in rates to 5.25 per cent will be needed in the New Year.

But such arguments will alarm households who are struggling with their debts. While the majority of borrowers are able to cope with their liabilities, a rate hike could push many over the edge.

Interest rates, currently 5 per cent, are already at a five-year high and another rise early in the New Year would come only weeks after they have stretched themselves to the limit to pay for Christmas. About one million people are already spending more than half their monthly income to pay their mortgage.

And while families who are well established on the housing market ladder may be in a position to enjoy their huge wealth, first-time buyers still are being left out in the cold. Britain is now one of the most expensive places in the world to buy a home, meaning there is a lack of new blood entering the property market.

Many experts believe a major downturn in house prices will be needed to correct the imbalances that have built up in the economy.

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