Comments: Brown slams on the brakes at the 11th hour

Hmm - David I'm not sure about the positive and negative equity comments. Both are pretty much hypothetical until you turn said assets into cash. The problem with negative equity is that it destroys liquidity. But if you can make the payments and have no pressing reason to sell then so what? Likewise my father's house is probably in the seven figure bracket these days. But again - so what? He doesn't want to sell it because that might mean giving up his chickens and his vegetable garden.
And with other supposedly assets - shares for instance - correct me if I'm wrong but they're not necessarily purely liquid (in as much as they can be instantaneously exchanged for cash at the prevailing market rate) - for instance if an institution owns a large chunk of company y it may not be able to put all its shares on the market without pushing that market downwards and I guess one could argue that currency speculators (such as Soros etc in 92) had the same effect with cash.
At some point a home is just a home - rather than an asset.

Posted by jonathan at March 18, 2007 03:40 PM

Your argument that nominal house prices only fall when there is high unemployment was more believable last year before we had the example of house prices in the US declining over the past year at the same time that unemployment there is near record low levels (along with stable or slightly declining long term interest rates).

On the main point of the article, though, I'm wondering just how growth is going to be maintained in the UK if growth in government spending (about 1/3 of the economy) is cut in half. Do most economist believe that growth in the UK is going to decline significantly, or is another sector forecasted to take up the slack from growth in public spending?

Posted by RichB at March 18, 2007 05:27 PM

In my view, once you stop regarding assets as wealth, you are questioning the whole basis of the economic system. Cash may be king but there is a lot more to wealth than liquid assets.

The US situation is interesting. But so far, at least, it is still following the script. Nominal house prices rose by 1% last year and have never fallen on a calendar year basis in the modern era. Existing house prices are currently down modestly on a year ago (3%), which is a long way from a crash. It remains to be seen whether that will continue or whether they will recover later in the year to continue that calendar year record.

Can the UK economy grow as fast if public spending slows? It is going to be an interesting challenge. The great rebalancing requires slower growth in government spending and household consumption to be offset by stronger exports and investment. Investment is in fact picking up quite strongly but the jury's out on exports.

Posted by David Smith at March 18, 2007 06:47 PM

Actually David I am questioning the whole basis of the economic system, and questioning our fundamental assumptions is a worthwhile task. Otherwise, dare I say, we'd still all believe that the Earth was made in six days (or that the world economy had entered a 'new paradigm' with the dot com boom of the late 90s. Questioning can lead to reaffirmation as well as rejection - whereas taking the fundamentals for granted is dangerous.
You know a weekend at the odd rock festival or three weeks back packing in India or even a month in Tuscany if you're feeling past that sort of thing can all put a healthy space between oneself and the things one takes for granted.

Posted by jonathan at March 19, 2007 01:27 AM

Being Devil's advocate, this definition of wealth can then be extrapolated.

If "wealth" includes all things that you have that are of value, then how about totting up the total value of your body parts and counting that as wealth ?

All you have to do is sell them when you want the cash.. !

I don't agree with your view, but I can see why some people would.

In my opinion, if you live in a nice house, you will feel "wealthy" because you live in a nice house, regardless of it's cash value. After all, if you want to swap it with another nice house, you will find that it's absolute cash value is irrelevant, it is it's relative cash value that counts.

If you want to swap your nice house for something other than property, then yes I guess you will be "wealthy", but what proportion of the population does that cover ?

Nick

Posted by Nick Thorne at March 19, 2007 09:46 AM

It is right to question assumptions but I think you're in danger of going too far down the hippy trail. The dot.com boom was an over-reaction but the evidence is that we did enter a new paradigm and are still in it, in terms of technology-driven productivity growth and the way that the internet is transforming our lives.

I hope my body parts are as good as the Duke of Westminster's but on any reasonable measure he is wealthier than I am. If money matters, as it has done since man started to trade in cowrie shells, then so does wealth, which is stored-up money. Three weeks in India exposes you to a country determined to achieve rapid economic growth and, yes, a big increase in wealth.

Posted by David Smith at March 19, 2007 09:58 AM

Anyone with more property than they need will indeed feel wealthy.A more normal case of having just enough property, is very different.
The Duke can sell a few acres of Park Lane, and still have half of Mayfair. i.e. it won't affect his lifestyle.

A retired teacher on a 20K pa pension living in a 450K 4 bed house in Surrey cannot liquidate his "wealth" because that would require a move to a 250K 2 bed flat in e.g. Southampton.
His 200K is being used to keep the lifestyle he expects.
I guess he could use equity withdrawal, but then he would be sacrificing e.g. ability to move later on.

On a similar subject, I have noticed a new form of "negative equity" emerging.
Here is an example: A BTL landlord buys a house in 2001 for 150K. In 2005 it has risen to 230K. He remortgages it, extracting 80K and lives off the money. Two years (2007) down the line he cannot sell the house because he cannot pay back the CGT he will owe. I have seen it happen.

Posted by Nick Thorne at March 19, 2007 05:26 PM
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